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
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.