The Likelihood of Loss

Question: The likelihood of loss in connection with many contingencies is not always going to be probable or

subject to a reasonable estimation. What reporting is appropriate for a loss contingency that does not qualify for

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recording at the present time?

Answer: If the likelihood of loss is only reasonably possible (rather than probable) or if the amount of a probable

loss does not lend itself to a reasonable estimation, only disclosure in the notes to the financial statements is

necessary rather than actual recognition. A contingency where the chance of loss is viewed as merely remote can

be omitted from the financial statements.

Unfortunately, this official standard provides little specific detail about what constitutes a probable, reasonably

possible, or remote loss. “Probable” is described in Statement Number Five as likely to occur and “remote” is a

situation where the chance of occurrence is slight. “Reasonably possible” is defined in vague terms as existing

when “the chance of the future event or events occurring is more than remote but less than likely” (paragraph

3). The professional judgment of the accountants and auditors is left to determine the exact placement of the

likelihood of losses within these categories.

Not surprisingly, many companies contend that future adverse effects from all loss contingencies are only

reasonably possible so that no actual amounts are reported. Practical application of official accounting standards

is not always theoretically pure, especially when the guidelines are nebulous.