Financial Accounting and Reporting-CPA Exam 2025 – 400 Free Practice Questions to Pass the Exam

In financial accounting, a "probable" loss contingency is characterized by a likelihood of occurrence that is greater than 50%. This designation is critical for financial statement preparation, particularly under the guidelines established by the Financial Accounting Standards Board (FASB) in ASC 450.

When evaluating loss contingencies, events or conditions that are deemed probable indicate that there is more than a 50% chance that the loss will occur. Under this classification, an entity is required to recognize the loss in its financial statements, meaning it must record a liability and an expense based on the best estimate of the potential loss.

Understanding the threshold of probability is essential because it directly affects how an organization accounts for potential liabilities. If a loss is considered probable, disclosure and recognition are necessary; if it falls into categories of "unlikely" or "reasonably possible," different accounting treatments apply, such as mere disclosure without the requirement for recognition.

This distinction is fundamental for preparers of financial statements, as it ensures that users of the financial reports are appropriately informed of potential risks and obligations facing the entity.