US CMA Part 1 · Chapter 1 · Question 18 of 23
A company faces a lawsuit that it will probably lose. Its lawyers estimate the loss at between $200,000 and $600,000, with no amount in the range more likely than any other. What amount should be recognized under US GAAP and under IFRS respectively?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) US GAAP $200,000; IFRS $400,000
Explanation
Both frameworks recognize a liability when an outflow is probable and can be reasonably estimated. When no amount in a range is a better estimate, US GAAP (ASC 450) accrues the minimum of the range, so $200,000. IAS 37 uses the midpoint of a continuous range where each point is equally likely, so $400,000.
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