Liabilities

The terms implicit and effective can be used interchangeably.

Specifically, US GAAP uses implicit interest to define effective interest, making the two synonyms.

While IFRS does not incorporate implicit into its definition, the definition itself yields a comparable result.

In addition to defining effective interest, IFRS 9 Defined terms explains how it should be calculated.

Defined terms (edited): ... When calculating the effective interest rate, an entity shall estimate the expected cash flows by considering all the contractual terms of the financial instrument (for example, prepayment, extension, call and similar options) but shall not consider the expected credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate ..., transaction costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the entity shall use the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments).

As the ASC does not provide guidance on how to calculate effective interest, the above approach, as outlined in ASC 105-10-05-3.d, is applicable in a US GAAP context as well.

In this illustration, the implicit rate is obvious: 7.5% = 7,500 ÷ 100,000.

In less obvious situations, the implicit rate would need to be determined.

Historically, arm’s length was the criterion for evaluating transactions and determining value.

Currently, the criteria are orderly transactions between market participants.

A stated interest rate could be unreasonable for various reasons.

The most common, assuming they are unrelated, the debtor and creditor have entered into a side agreement.

As outlined in ASC 835-30, an interest rate must be reasonable, in that it must reflect an established exchange price for the liability. If not, a reasonable interest rate, one that does reflect this price, is imputed.

While "imputation" in only discussed in the ASC, IFRS 9 does provide guidance with a comparable result.

Although the term appears in some (older) guidance, neither IFRS nor US GAAP have ever defined arm's length.

However, a good working definition is a price in an exchange between parties that are:

• unrelated
• fully informed, and
• acting voluntarily.

Also see one of the better summaries: link law.cornell.edu.

Note: the concept of arm's length features prominently in OECD, particularly transfer pricing, guidance. However, as the OECD’s purpose is to further cooperation between governments in developing common taxation policies, its influence on IFRS and US GAAP is derivative. For this reason, most accountants do not need to consider this guidance, which is fortunate since, unlike the IASB and FASB which make their guidance, in the public interest, freely available on line, the OECD hides its behind a paywall.

Before IFRS 13 | ASC 820, arm's length transactions were the way to objectively determine value.

Since IFRS 13 | ASC 820, transactions must be orderly instead.

IFRS 13 | ASC 820 define orderly: A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale).

In addition to being orderly, IFRS 13 | ASC 820 also requires the transactions to be between market participants, or buyers/sellers that are:

• independent
• knowledgeable
• willing and
• able

In more detail.

As outlined in ASC 835-30-25-6, if the interest associated with a liability is influenced by a side agreement, written or unwritten, it is adjusted to reflect the effect of that agreement.

While IFRS 9 does not discuss "unstated rights or privileges," the guidance it does provide has the same effect.

Unlike ASC 835-30-45, IFRS 9.B5.4.1 to 4 also go into some detail about costs reflected (IFRS 9.B5.4.2) / not reflected (IFRS 9.B5.4.3) in effective interest (deducted / not deducted from the liability). However, this additional guidance is not relevant to the situation being illustrated.

The simplest way to calculate an implicit rate is Excel's =IRR or =XIRR function.

It can also be calculated by trial and error using a present value schedule:

The terms implicit and effective can be used interchangeably.

Specifically, US GAAP uses implicit interest to define effective interest, making the two synonyms.

While IFRS does not incorporate implicit into its definition, the definition itself yields a comparable result.

The lender calculated the payment (in Excel syntax): 24716=ROUND(100000/((1-(1/(1+7.5%)^5))/7.5%), 0)

To calculate the implicit rate, XYZ evaluated the cash flow associated with the loan.

The simplest way to do so (in Excel syntax): 7.5%=ROUND(RATE(5,-24716,100000,0,0), 3).

Although not as simple, =IRR or =XIRR also do the job.

Another way is by trial and error using a present value schedule:

Historically, arm’s length was the criterion for evaluating transactions and determining value.

Currently, the criteria are orderly transactions between market participants.

A stated interest rate could be unreasonable for various reasons.

The most common, assuming they are unrelated, the debtor and creditor have entered into a side agreement.

As outlined in ASC 835-30, an interest rate must be reasonable, in that it must reflect an established exchange price for the liability. If not, a reasonable interest rate, one that does reflect this price, is imputed.

While "imputation" in only discussed in the ASC, IFRS 9 does provide guidance with a comparable result.

Although the term appears in some (older) guidance, neither IFRS nor US GAAP have ever defined arm's length.

However, a good working definition is a price in an exchange between parties that are:

• unrelated
• fully informed, and
• acting voluntarily.

Also see one of the better summaries: link law.cornell.edu.

Note: the concept of arm's length features prominently in OECD, particularly transfer pricing, guidance. However, as the OECD’s purpose is to further cooperation between governments in developing common taxation policies, its influence on IFRS and US GAAP is derivative. For this reason, most accountants do not need to consider this guidance, which is fortunate since, unlike the IASB and FASB which make their guidance, in the public interest, freely available on line, the OECD hides its behind a paywall.

Before IFRS 13 | ASC 820, arm's length transactions were the way to objectively determine value.

Since IFRS 13 | ASC 820, transactions must be orderly instead.

IFRS 13 | ASC 820 define orderly: A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale).

In addition to being orderly, IFRS 13 | ASC 820 also requires the transactions to be between market participants, or buyers/sellers that are:

• independent
• knowledgeable
• willing and
• able

In more detail.

As outlined in ASC 835-30-25-6, if the interest associated with a liability is influenced by a side agreement, written or unwritten, it is adjusted to reflect the effect of that agreement.

While IFRS 9 does not discuss "unstated rights or privileges," the guidance it does provide has the same effect.

Technically, as outlined in IFRS 4.2.1, amortized cost accounting is required for all financial liabilities except: (a) those measured at FVtP&L, (b) those that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies, (c) financial guarantee contracts, (d) commitments to provide a loan at a below-market interest rate and (e) contingent consideration recognised by an acquirer in a business combination.

IFRS 9 distinguishes revisions to cash flow estimates caused by changes in interest rates (IFRS 9.B5.4.5) and those caused by other changes (IFRS 9.B5.4.6), with the latter subject to additional guidance, which may lead to a remeasurement of the liability in some circumstances.

The discount rate used to amortize the liability in the first period, is the initial implicit rate.

The simplest way to calculate this rate is Excel's =RATE function: 7.5%=RATE(5,-24716,100000,0,0).

Alternatively, the =IRR or =XIRR functions can be used:

In the second period, XYZ adjusted the implicit rate to reflect the change in the payments.

The simplest way to calculate an implicit rate is Excel's =RATE function: 8%=RATE(4,-24994,82784,0,0).

Alternatively, the =IRR or =XIRR functions can be used:

If, for the sake or accuracy, exact dates need to be considered, it can also be calculated:

The proper way to calculate monthly payments based on an annual rate is (in Excel syntax):

1,992.12=round(100000/((1-(1/(1+((1+7.5%)^(1/12)-1))^(5*12)))/((1+7.5%)^(1/12)-1)),2).

The reason? An annual rate should not be converted to a monthly rate by simple division, but with some mathematical finesse (in Excel syntax):

0.604%=ROUND((1+7.5%)^(1/12)-1,5)

Or 0.604491902429172%=(1+7.5%)^(1/12)-1, if more accuracy is desired.

Obviously, it is possible to convert an annual rate, as suggested by this site, to an interim rate by simple division.

Using this approach will yield (in Excel syntax) monthly payments of:

2,003.79=round(100000/((1-(1+7.5%/12)^(-5*12))/(7.5%/12)),2)

Whether a lender would choose this approach out of a lack of mathematical finesse or because it leads to higher payments is a question. But, it does happen.

For example, a broker with whom the author has experience calculates its margin interest this way. Given that running brokerages usually requires some mathematical finesse, the answer to the question, in this particular situation, seems fairly obvious.

ASC Master Glossary (edited): The rate of return implicit in the financial asset, that is, the contractual interest rate adjusted for any net deferred fees or costs, premium, or discount existing at the origination or acquisition of the financial asset...

IFRS 9 Defined terms (edited): The rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability...

Except in a business combination.

As outlined in IFRS 3.23, if a contingent liability arises from a business combination, it is recognized "...if it is a present obligation that arises from past events and its fair value can be measured reliably" irrespective of the guidance provided by IAS 37.27 to 30.

However, this only applies to contingent liabilities. Contingent assets, as outlined in IFRS 3.23A, are not recognized.

An interesting analysis of some implications this change can be found in this dissertation (link / local link).

It is possible that US GAAP's higher threshold could lead an entity to skip the contingent liability phase altogether.

For example, the inherent uncertainly of litigation means an entity could estimate the probability it will prevail at 50/50 right up until the verdict is read. In such a situation, it would never recognize a contingent liability, but rather a regular liability, but only if it were found liable.

In the past, the IASB used to hold staff days for teachers where academics from all over the world had the opportunity to interact with the IASB staff. During one such meeting in 2012, the topic of probability came up. As the information provided was not particularly satisfying, the attendees asked the staff member in charge "so what are we supposed to tell out students?"

The staff member replied: "the conceptual framework does not quantify the term probable and it is not used consistently throughout the standards."

Being academics, we had been able to read this for ourselves, so we requested a real answer.

Eventually, the staff member relented and said "The conceptual farmwork does not quantify the term probable nor is it quantified the standard level. Nevertheless, in practice most practitioners interpret it as 50% or more, auditors interpret it as 50% or more, regulators interpret its 50% or more, at court it is generally interpreted as 50% or more and, when board members discusses probability, they also generally take it to mean 50% or more. However, and this is very important, you may never, ever tell your students that the IFRS conceptual framework, nor any standard, explicitly states that probable should be quantified as 50% or more.

Satisfied with this answer, the discussion moved on to other issues.

Another difficulty, occasionally the term probable, in the ASC 450 context, is misinterpreted.

FAS 5 (now ASC 450) was adopted in 1975. As it pre-dates the conceptual framework, its guidance is a bit dated. So, while its definition of a contingency fits with the conceptual framework, its recognition guidance less so.

Specifically, the phrase "information... indicates that it is probable that ... a liability had been incurred at the date of the financial statements" if taken literally, indicates that what is contingent is the liability itself, not just the timing or amount of the liability. Adding to the confusion, this phrase is also consistent with the dictionary definition of contingent leading many people to assign a higher probability to contingent liabilities than other obligations.

In any event, this "misinterpretation" of the guidance caught the attention of the FASB which, in the latest iteration of the conceptual framework, clarified:...contingent liabilities satisfy the definition of a liability because the contingency does not relate to whether a present obligation exists but instead relates to one or more uncertain future events that affect the amount that will be required to settle the present obligation. For those obligations, the fact that the outcome is unknown affects the measurement but not the existence of the liability...

Consequently, provided ASC 450-20-25-2.a is interpreted the way the FASB says it should be interpreted (not literally), contingent liabilities are evaluated using the same probability as anything else.

At its December 2023 meeting, the IASB decided to make the next project milestone the publication of an exposure draft for stakeholder comment.

Note: in addition to discount rates the draft will include additional, targeted improvements to IAS 37.

ASC 410-20-30-1 states (edited): an expected present value technique will usually be the only appropriate technique with which to estimate the fair value of a liability for an asset retirement obligation...

ASC 420-10-30-1 requires the liability to be initially measured at fair value. While this guidance does not preclude using a different method to determine that fair value, in practically all situations it will be determined using a present value technique.

To reinforce this interpretation, FASB XBRL includes RestructuringReserve, RestructuringReserveCurrent and RestructuringReserveNoncurrent labels.

These items represent (edited) the "carrying amount as of the balance sheet date of known and estimated obligations associated with exit from or disposal of business activities or restructurings pursuant to a duly authorized plan, which are expected to be paid.... Costs of such activities include those for one-time termination benefits, termination of an operating lease or other contract, consolidating or closing facilities, relocating employees, and costs associated with an ongoing benefit arrangement, but excludes costs associated with the retirement of a long-lived asset."

Note: ASC 450-20-50-1 states :... The term reserve shall not be used for an accrual made pursuant to paragraph 450-20-25-2; that term is limited to an amount of unidentified or unsegregated assets held or retained for a specific purpose...

However, RestructuringReserve does not comprise "assets held or retained for a specific purpose" but rather "estimated obligations associated with exit from or disposal of business activities or restructurings." No reason why the term "reserve" is acceptable under ASC 420 but not ASC 450 is given.

Technically, just the number of employees to be compensated for terminating their services.

IAS 37.80 fails to identify the specific direct expenditures necessarily entailed by the restructuring leaving more room for judgment than ASC 420.

On the other hand, IAS 37.81 is more specific, stating that retraining or relocating continuing staff, marketing, and investment in new systems and distribution networks may not be included.

This general guidance is echoed in the illustrations where example 1 (ASC 420-10-55-3) shows the entity identifying the exact number of employees it intends to terminate, determining the exact amount each employee will be entitled to and calculating the obligation by multiplying the two numbers.

Technically, just the number of number of employees entitled to termination benefits.

Note: the guidance is also explicit in that it applies only to termination benefits specifically associated with the restructuring ("one-time employee termination benefits"). All other employee benefits, as outlined in ASC 420-10-15-6, are subject to the pertinent 7XX guidance (ASC 710 General, ASC 712 Nonretirement Postemployment Benefits, ASC 715 Retirement Benefits and ASC 718 Stock Compensation).

Technically, ASC 420-10-25-11 identifies two contract costs: those associated with terminating a contract and those associated with a contract that is not terminated but is without economic benefits, such as the continued leasing of empty premises.

The former are recognized at the termination date (ASC 420-10-25-12), while the latter at the cease-use date (ASC 420-10-25-13).

While ASC 420 does address costs other than one-time employee termination benefits and contract termination costs, ASC 420-10-25-15 states (edited, emphasis added): ...A liability for other costs associated with an exit or disposal activity shall be recognized in the period in which the liability is incurred...

Thus, while other associated costs may be incurred, they would not be included in the initial liability, but recognized, i.e. as regular payables, as incurred.

This assumes the respective probabilities can be determined. If not: "Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used."

Nevertheless, while roughly comparable, IFRS | US GAAP guidance is not identical, especially since, instead of putting it all in one place, US GAAP spreads its out.

For example, some contracts can fall into the guidance on commitments (ASC 440-10-25-4 addresses purchase commitments associated with inventory, although it points to ASC 330-10-35-17 and 18 for the details). Some contracts may also fall into industry specific guidance, for example ASC 954-440, ASC 954-450, or ASC 980-350.

Also, ASC 420-10-25-13 discusses details, such as specifying a cease-use date, which IAS 37.66 to 69 do not address.

In sum, while IFRS | US GAAP guidance is roughly comparable, depending on the entity and the types of contracts it has, it could lead to some reporting, measurement and disclosure differences.

Note: to avoid confusing them with "onerous" contracts, this page refers the US GAAP version as disadvantageous, though both onerous and disadvantageous contracts could be labeled as unfavorable.

FAS 5 was adopted in 1975. It was codified, as ASC 450, without an update. As such, it pre-dates even the first conceptual framework by five years and, by today's standards, is, to put it mildly, archaic.

ASC 710-10-25-2 states (edited):...The definition [of a liability] also encompasses a constructive obligation for reasonably estimable compensation for past services that, based on the employer's past practices, probably shall be paid and can be reasonably estimated.

While it may be theoretically possible to take this guidance into consideration, going from something as focused as compensated absences to something as broad as contingent liabilities is not only a stretch, but unnecessary.

Reading ASC 450 (carefully), one comes across ASC 450-20-55-14 which states (edited, emphasis added): With respect to unasserted claims and assessments, an entity 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. If an unfavorable outcome is probable and the amount of loss can be reasonably estimated, accrual of a loss is required by paragraph 450-20-25-2. ...

Not only does the guidance suggest an obligation should be recognized if the entity expects a suit to be filed, a claim may also merely be asserted.

Given the litigious nature of the US business environment and the uncertainty inherent in common law jury trials, claims are often settled well before they are formally filed.

Similarly, for issues such as environmental harm, aggressive labor practices or product liability, it is often in a company’s best interest to settle and avoid the bad publicity well before a formal court filing catches the attention of the press, or social media.

From this perspective, that ASC 450 does not use the term "constructive obligations" for obligations that have not yet, and perhaps never will, begun their journey through the legal process, does not mean these obligations should not be recognized.

In forming that judgment, one should consider CON 8.Ch4.E50 (edited) where the FASB explains: ...A constructive obligation is created, inferred, or construed from the facts in a particular situation rather than contracted by agreement with another entity or imposed by government. An entity may become constructively obligated through customary business practice. In the normal course of business, an entity conducting certain activities may not create a clear contractual obligation but may nonetheless cause the entity to become presently obligated...

While this, in and of itself, does not justify recognizing a constructive obligation, CON 8.Ch4.E52 continues: Determining whether an entity is bound by an obligation to a third party in the absence of a clear determination of legal enforceability is often extremely difficult. Thus, the concept of constructive obligations must be applied with great care. Overly narrow interpretations tend to exclude significant actual obligations of an entity, while too-broad interpretations effectively nullify the definition of liabilities.

The key phrase: "must be applied with great care," which does not mean cannot be applied ever.

Another important phrase: "exclude significant actual obligations" something financial statement users, and even the SEC, hate almost as much as overstated revenue.

Finally, whether it is extremely difficult or merely somewhat challenging, is a matter of opinion.

Specifically, ASC 105-10-05-2 states (edited, emphasis added): If the guidance for a transaction or event is not specified within a source of authoritative GAAP for that entity, an entity shall first consider accounting principles for similar transactions or events within a source of authoritative GAAP for that entity and then consider nonauthoritative guidance from other sources...

According to ASC 105-10-05-3.d, nonauthoritative guidance from other sources includes International Financial Reporting Standards.

Thus, considering CON 8.Ch4, ASC 105-10-05-2 and ASC 105-10-05-3.d, one could conclude that applying IAS 37.17 to 21, guidance under which recognizing constructive obligations is not that difficult, to fill in the gaps of an outdated topic like ASC 450 would be reasonable, even in the absence of a clear determination of legal enforceability.

As it is a stand-alone topic, ASC 410-30 provides more detailed and more prescriptive guidance. This can result in somewhat different results.

Even when the guidance is comparable, it can be subtly different.

For example, ASC 410-30-35-8 states (edited): ...The amount of an environmental remediation liability should be determined independently from any potential claim for recovery, and an asset relating to the recovery shall be recognized only when realization of the claim for recovery is deemed probable...

This implies, under ASC 410, a contingent gain, if associated with a potential recovery of amounts expended for environmental remediation, may be recognized before it is realized even though this is not consistent with the general, contingent gain guidance provided by ASC 450-30-25-1.

IAS 37 also addresses reimbursement, but IAS 37.53 states (edited):...the reimbursement shall be recognised when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation...

So both US GAAP and IFRS recognize reimbursements before they are realized but, since probable in US GAAP is around 75%-80% while virtually certain is generally 90%-95%, US GAAP will probably recognize them sooner.

Somewhat more pronounced, IAS 37.5 states: In the statement of comprehensive income, the expense relating to a provision may be presented net of the amount recognised for a reimbursement. This implies that it would not be appropriate to present the item as a gain as is common, US GAAP practice.

Again, a difference, but whether it is major or minor, is a matter of opinion.

The disclosure of commitment is discussed, for example, in IAS 10.22.i, IAS 16.74.c, IAS 24.18.b and 21.i, IAS 38.122.e, IAS 41.49.b, IFRS 12.19D.b and 23.a, IFRS 7.14, 35B.c and B48, or IFRS 17.55.

ASC 440-10-50-1 requires disclosure of:

1. Unused letters of credit
2. Leases
3. Assets mortgaged, pledged, or otherwise subject to lien; the approximate amounts of those assets; and the related obligations collateralized
4. Pension plans
5. The existence of cumulative preferred stock dividends in arrears
6. Commitments, including:
1. A commitment for plant acquisition
2. An obligation to reduce debts
3. An obligation to maintain working capital
4. An obligation to restrict dividends.

Unfortunately, this list is not exhaustive. Additional guidance is provided at the topic (particularly industry specific) level. For example: ASC 920-440-50-1, ASC 928-440-50-1 or ASC 952-440-50-1.

Also, ASC 440-10-50-2 to 7 provide additional guidance on unconditional purchase obligations. However, as outlined in ASC 440-10-25-1 to 4, an unconditional purchase obligation should first be evaluated to see if it is subject to ASC 842, ASC 815 or ASC 330. Only if not, would it be subject to ASC 440.

Note: while the illustration in ASC 440-10-55 ("an integral part of the requirements of [the] Subtopic") suggests commitments should be disclosed in some detail, in practice, that much detail practically never appears in any published, financial report. The issue of information overload is also discussed in the last illustration on this page.

1. Contracts that contingently require a guarantor to make payments ... to a guaranteed party based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party. For related implementation guidance, see paragraph 460-10-55-2.
2. Contracts that contingently require a guarantor to make payments ... to a guaranteed party based on another entity's failure to perform under an obligating agreement (performance guarantees). For related implementation guidance, see paragraph 460-10-55-12.
3. Indemnification agreements (contracts) that contingently require an indemnifying party (guarantor) to make payments to an indemnified party (guaranteed party) based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party.
4. Indirect guarantees of the indebtedness of others, even though the payment to the guaranteed party may not be based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party.

1. A guarantee or an indemnification that is excluded from the scope of Topic 450 (see paragraph 450-20-15-2—primarily employment-related guarantees)
2. A lessee's guarantee of the residual value of the underlying asset at the expiration of the lease term under Topic 842
3. A contract that meets the characteristics in paragraph 460-10-15-4(a) but is accounted for as variable lease payments under Topic 842
4. A guarantee (or an indemnification) that is issued by either an insurance entity or a reinsurance entity and accounted for under Topic 944 (including guarantees embedded in either insurance contracts or investment contracts)
5. A contract that meets the characteristics in paragraph 460-10-15-4(a) but provides for payments that constitute a vendor rebate (by the guarantor) based on either the sales revenues of, or the number of units sold by, the guaranteed party
6. A contract that provides for payments that constitute a vendor rebate (by the guarantor) based on the volume of purchases by the buyer (because the underlying relates to an asset of the seller, not the buyer who receives the rebates)
7. A guarantee or an indemnification whose existence prevents the guarantor from being able to either account for a transaction as the sale of an asset that is related to the guarantee's underlying or recognize in earnings the profit from that sale transaction
8. A registration payment arrangement within the scope of Subtopic 825-20 (see Section 825-20-15)
9. A guarantee or an indemnification of an entity's own future performance (for example, a guarantee that the guarantor will not take a certain future action)
10. A guarantee that is accounted for as a credit derivative at fair value under Topic 815.
11. A sales incentive program in which a manufacturer contractually guarantees to reacquire the equipment at a guaranteed price or guaranteed prices at a specified time, or at specified time periods (for example, the entity is obligated to reacquire the equipment or the entity is obligated at the customer's request to reacquire the equipment). That program shall be evaluated in accordance with Topic 606 on revenue from contracts with customers, specifically the implementation guidance on repurchase agreements in paragraphs 606-10-55-66 through 55-78.

The ASC 450-20 definition (quoted above) specifies that the condition, situation, or set of circumstances leading to the loss contingency be existing which means it must be present at the balance sheet date.

It is thus consistent with CON 8.Ch4.

ASC 450-20-25-2 (emphasis added) states: An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:

1. Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.
2. The amount of loss can be reasonably estimated.

Merriam-Webster (link) defines contingent: dependent on or conditioned by something else.

Applied to an accounting context: if we lose a pending lawsuit, then we will pay a fine, making fine, hence the liability, dependent on or conditioned by the lawsuit.

One result, this interpretation is reflected in US GAAP educational material, and has been for some time.

For example, Intermediate Accounting, Kieso & Weygandt, 5th edition, page 661, states: What must be known is whether it is probable that a liability has been incurred.

While it has been updated over the years, page 674 of the 18th edition continues to state (emphasis added): Contingent liabilities depend on the occurrence of one or more future events to confirm either the payable, the payee, the date payable or its existence. That is these factors depend on a contingency.

When the author of this web page was still at school and the discussion turned to the meaning of the word probable on page 661, our professor explained contingent liabilities were not like regular liabilities. They were special.

As the liability was not based on a past transaction or event, but something that has yet to occur, the probability could not be the standard 75% to 80%, but a higher, 95% plus.

Being young and impressionable, none of us thought to point out the logical inconsistency between the definition and the guidance, nor the non-conceptual nature of that guidance.

Well, no one except Johny, who intended to become an actuary, and enjoyed giving teachers a hard time.

CON 4.8.E60 (edited, emphasis added): Sometimes present obligations with uncertain amounts and timing are referred to as contingent liabilities. The term contingent liability has been a source of confusion because it is often thought to refer to circumstances in which the existence of an obligation depends on the occurrence or nonoccurrence of a future event. Absent a present obligation, the occurrence or nonoccurrence of a future event does not by itself give rise to a liability...

As receivables are linked to revenue, IFRS 15 | ASC 606 provides the primary guidance. However, as they are also financial assets, IFRS 15.108 | ASC 606-10-45-4 points to IFRS 9 | ASC 310 and ASC 326-20 for guidance on how to deal with uncollectible accounts.

As noted above, US GAAP does not specifically mention "onerous contracts." Nevertheless, ASC 420-10-25-11.b does mention costs that will continue to be incurred under the contract for its remaining term without economic benefit to the entity.

Is this different from a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it (IAS 37.68)?

Maybe, but not by much.

So, the only palpable difference, IAS 37 does not mind estimates, while ASC 420 prefers more precision.

Note: to avoid confusing them with "onerous" contracts, this page refers the US GAAP version as disadvantageous, though both onerous and disadvantageous contracts could be labeled as unfavorable.

International companies applying US GAAP face the additional challenge that, unlike IFRS, which assumes it will be applied in various jurisdictions with various legal traditions, US GAAP is geared toward the particular flavor of common law used in the USA.

This can make applying its guidance to commitments, guarantees and contracts entered into outside the USA somewhat more challenging.

As accounting and law are separate disciplines, accountants quickly become accustomed to consulting their legal colleges and incorporating their views into IFRS | US GAAP recognition and measurement guidance.

For this reason, IAS 37 allows experts to assist with the recognition (IAS 37.16) and especially measurement (IAS 37.38) of provisions.

US GAAP gives similar guidance in ASC 450-20-55-12.c.

As outlined in IAS 37.36 and 37, a provision is measured at the expenditure required to settle the obligation, or what the entity would rationally pay to transfer the obligation to a third party.

As the only third parties generally interested in assuming such obligations are insurance companies, these seemingly innocuous paragraphs point to perhaps the most challenging guidance of all: IFRS 17.

In other words, to apply the guidance as written, one needs estimate what an insurance company, or similar third party, would rationally charge to assume the liability. One way to do so is to ask, assuming can find an insurance company, or similar third party, willing and able to make an offer.

The other is to pretend to be an insurance company apply IFRS 17.

Note: unlike ASC 450, IAS 37 does not explicitly discuss unasserted claims and assessments. This does not, however, mean they will never be recognized.

ASC 450-20-30-1 states (edited): If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, that amount shall be accrued...

It does not, however, provide any clue as to how this, or any amount, should be determined.

Fortunately, ASC 420-20-30-1 states (edited, emphasis added): A liability for a cost associated with an exit or disposal activity shall be measured initially at its fair value...

ASC 420-10-30-2 continues (edited): Quoted market prices are the best representation of fair value. However, for many of the liabilities covered by this Subtopic, quoted market prices will not be available. Consequently, in those circumstances, fair value will be estimated using some other valuation technique...

Consequently, similarly to IAS 37, an entity could solicit an offer (quoted market price) from, for example, an insurance company. However, unlike IAS 37, it would not need to pretend it is an insurance company.

Fortunately, as the contingent liabilities covered by ASC 450 are not discounted, at least an entity does not need to determine an appropriate discount rate.

Unasserted claims and assessments are discussed in ASC 450-20-55-1, ASC 450-20-50-6 and ASC 450-20-S99-1.

Unasserted claims and assessments are comparable to asserted claims and assessments in that they are accrued if probable and estimable. However, as they are unasserted, neither the entity nor its accounting department has to know they exist.

One way to deal with this: send all managers a form asking them to detail any situation where they think the company may have done something that could lead to a lawsuit being filed or threatened. And, while they are at it, if they could throw in an estimate, that would be great. And, adding probability quantifications would also be a nice touch. Oh, by the way, this needs to be submitted at least a month before year end so it can be reviewed and any additional questions posed.

No wonder no one wants to sit with the accountants at lunch, they're worse than science hippies (but just as useful).

For this reason, IAS 37 allows experts to assist with the recognition (IAS 37.16) and especially measurement (IAS 37.38) of provisions.

US GAAP gives similar guidance in ASC 450-20-55-12.c.