One of the most difficult estimation questions in accounting is when contingent liabilities need to be recognized in a company’s financial statements. The FASB indicated in Statement No. 5 that a liability and loss should be reported in the financial statements if it is probable that a loss will be incurred and the amount of the loss can be estimated. What is the meaning, however, of probable? Some accountants have interpreted this as meaning near certainty; others as being at a lower percentage of certainty such as above 90%, 85%, or some other number.
In 1992, the FASB issued Statement No. 109, which requires reporting of deferred income tax assets if it is more likely than not that a company will have future income sufficient to realize the asset. The term “more likely than not” is defined as above 50%.
Because of the use of a new probability concept, some accountants have suggested that the definition of “probable” used in Statement No.5 should be made more specific, perhaps even using the more-likely-than-not criterion for contingent liabilities. What are the arguments for and against this suggestion?