Under what circumstances would Aerus accrue an estimated liability in its financial statements related to a contingency?
Aerus Franchise · 2025 FDDAnswer from 2025 FDD Document
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company's financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in which case the guarantees would be disclosed.
Source: Item 23 — Receipts (FDD pages 74–305)
What This Means (2025 FDD)
According to Aerus's 2025 Franchise Disclosure Document, Aerus would accrue an estimated liability in its financial statements if a contingency indicates that a material loss is probable and the amount of the liability can be estimated. This involves Aerus's management and legal counsel assessing potential contingent liabilities, which requires judgment, especially in legal proceedings or unasserted claims.
If a potentially material loss contingency is deemed not probable but reasonably possible, or if it is probable but the amount cannot be estimated, Aerus would disclose the nature of the contingent liability. This disclosure would include an estimate of the range of possible loss, provided it is determinable and material. Contingencies considered remote are generally not disclosed, unless they arise from guarantees, in which case the guarantees would be disclosed.
In practical terms, this means that if Aerus faces a lawsuit and it is likely they will lose a significant amount of money, and they can reasonably estimate how much they will lose, they must record this as a liability on their balance sheet. If the loss is possible but not likely, or if it is likely but they can't estimate the amount, they must disclose the situation in the notes to their financial statements. This ensures transparency about potential financial risks facing the company.