Copyright © 1975, Financial Accounting Standards Board Not for redistribution
38. With respect to unasserted claims and assessments, an enterprise must determine the degree of probability
that a suit may be filed or a claim or assessment may be asserted and the possibility of an unfavorable outcome.
For example, a catastrophe, accident, or other similar physical occurrence predictably engenders claims for
redress, and in such circumstances their assertion may be probable; similarly, an investigation of an enterprise
by a governmental agency, if enforcement proceedings have been or are likely to be instituted, is often followed
by private claims for redress, and the probability of their assertion and the possibility of loss should be
considered in each case. By way of further example, an enterprise may believe there is a possibility that it has
infringed on another enterprise's patent rights, but the enterprise owning the patent rights has not indicated an
intention to take any action and has not even indicated an awareness of the possible infringement. In that case, a
judgment must first be made as to whether the assertion of a claim is probable. If the judgment is that assertion
is not probable, no accrual or disclosure would be required. On the other hand, if the judgment is that assertion
is probable, then a second judgment must be made as to the degree of probability of an unfavorable outcome. If
an unfavorable outcome is probable and the amount of loss can be reasonably estimated, accrual of a loss is
required by paragraph 8. If an unfavorable outcome is probable but the amount of loss cannot be reasonably
estimated, accrual would not be appropriate, but disclosure would be required by paragraph 10. If an
unfavorable outcome is reasonably possible but not probable, disclosure would be required by paragraph 10.
39. As a condition for accrual of a loss contingency, paragraph 8(b) requires that the amount of loss can be
reasonably estimated. In some cases, it may be determined that a loss was incurred because an unfavorable
outcome of the litigation, claim, or assessment is probable (thus satisfying the condition in paragraph 8(a)), but
the range of possible loss is wide. For example, an enterprise may be litigating an income tax matter. In
preparation for the trial, it may determine that, based on recent decisions involving one aspect of the litigation, it
is probable that it will have to pay additional taxes of $2 million. Another aspect of the litigation may, however,
be open to considerable interpretation, and depending on the interpretation by the court the enterprise may have
to pay taxes of $8 million over and above the $2 million. In that case, paragraph 8 requires accrual of the $2
million if that is considered a reasonable estimate of the loss. Paragraph 10 requires disclosure of the additional
exposure to loss if there is a reasonable possibility that additional taxes will be paid. Depending on the
circumstances, paragraph 9 may require disclosure of the $2 million that was accrued.
Catastrophe Losses of Property and Casualty Insurance Companies
40. At the time that a property and casualty insurance company or reinsurance company issues an insurance
policy covering risk of loss from catastrophes, a contingency arises. The contingency is the risk of loss
assumed
by the insurance company, that is, the risk of loss from catastrophes that may occur
during the term of the
policy.
The insurance company has not assumed risk of loss for catastrophes that may occur
beyond
the term of
the policy. Clearly, therefore, no asset has been impaired or liability incurred with respect to catastrophes that
may occur beyond the terms of policies in force.
41. The conditions in paragraph 8 should be considered with respect to the risk of loss assumed by an
insurance company for catastrophes that may occur during the terms of policies in force to determine whether
accrual of a loss is appropriate. To satisfy the condition in paragraph 8(a) that it be probable that a liability has
been incurred to existing policyholders, the occurrence of catastrophes (i.e., the confirming future events) would
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