Liabilities and equity
Probable and Estimable
Probable and estimable means accrue, reasonably possible means disclose, remote means silence, and gains never accrue.
How the exam words it
- -The stem quotes counsel: a loss is 'probable', 'reasonably possible', or 'remote', and asks how to report it.
- -Estimates give a range and 'no amount within the range is a better estimate', and it asks 'what should be accrued?'.
- -The entity is the plaintiff expecting to win, a gain contingency.
- -Vacation pay vests and accumulates, or a purchase commitment's market price drops below contract price.
The playbook
- 1Grade the likelihood first: probable, reasonably possible, or remote.
- 2Probable and estimable: accrue the best estimate, or the minimum of a range when no point is better, and disclose the rest of the range.
- 3Reasonably possible: disclose only. Remote: neither accrue nor disclose.
- 4Gain contingencies are disclosed at most, never accrued; accrue compensated absences that vest or accumulate and losses locked in on purchase commitments.
The trap
Accruing the midpoint or maximum of a range. When no amount in the range is a better estimate, accrue the minimum and disclose the exposure above it.
How the exam varies it
The same pattern, re-skinned along these axes:
Likelihood grade: probable, reasonably possible, or remoteLoss versus gain contingencyPoint estimate versus range, accrual versus disclosure
Drill this pattern
8 questions of Probable and Estimable from across the AUD topics. Clear it by getting 5 right with a streak of 3.