The Strait of Hormuz escalation that began with Iranian attacks on three commercial vessels on July 7 and 8, 2026, followed by US strikes on more than 80 Iranian targets, creates four specific scenarios that require ASC 450 analysis before the Q2 10-Q is finalised. Each has a different fact pattern, a different probable/reasonably possible analysis, and a different balance sheet and disclosure outcome.
Oil is trading at approximately $75 per barrel WTI (up more than 6% on July 8). The IMO has urged ships to halt transit. At least four tankers have already turned back. The MOU signed June 17 has been declared over by President Trump. These are the current facts against which each contingency must be assessed.
What Is an ASC 450 Loss Contingency and When Must It Be Disclosed vs Accrued?
ASC 450-20 governs the accounting and disclosure for loss contingencies. A loss contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur.
Loss contingencies are assessed using a two-threshold framework based on the likelihood of loss.
A loss contingency must be accrued as a charge to income and a liability on the balance sheet when two conditions are both met: it is probable that an asset has been impaired or a liability has been incurred as of the date of the financial statements, and the amount of the loss can be reasonably estimated. Probable under ASC 450-20-25-2 means the future event is likely to occur. This is generally interpreted as a greater-than-75% likelihood, though ASC 450 does not specify a numerical percentage.
A loss contingency must be disclosed in the footnotes, even if not accrued, when it is at least reasonably possible that a loss has been incurred. Reasonably possible means the chance of the future event occurring is more than remote but less than likely. Where no accrual has been recorded but the loss is reasonably possible, the footnote must describe the nature of the contingency and provide an estimate of the possible loss or range of loss, or state that an estimate cannot be made.
A loss contingency that is only remote requires neither accrual nor disclosure.
The specific assessment must be made as of the balance sheet date, which for Q2 2026 is June 30, 2026. However, subsequent events between June 30 and the financial statement issuance date are relevant: under ASC 855-10-25-1, events that occur after the balance sheet date that provide additional evidence about conditions that existed at the balance sheet date affect the financial statements. The Strait of Hormuz escalation that began July 7 and 8 is a subsequent event that may provide evidence about whether specific loss contingencies existed as of June 30 or have arisen since.
Why the Strait of Hormuz Escalation Creates Specific Contingency Triggers Not Just Risk Factors
The distinction between a risk factor and a contingency trigger is precise and operationally important.
A risk factor describes a potential future loss that may or may not occur. It is appropriate for risks where no loss-causing event has yet occurred, and the loss depends on future events that are not certain or even probable.
A contingency trigger exists when a loss-causing event has already occurred, creating a specific obligation or impairment, and the question is whether that obligation or impairment is probable and estimable. The loss-causing event has happened. What remains uncertain is the amount or the ultimate legal resolution.
The Strait of Hormuz escalation has produced specific, already-occurred events that move certain exposures from the risk factor category into the ASC 450 contingency assessment category:
Vessels have been attacked. If a company owns or charters vessels that were in or near the Strait when the attacks occurred, or that have diverted as a result, those specific vessels have specific actual or potential claims.
Supply contracts have been disrupted. If a company has supply contracts calling for goods to be shipped through the Strait and those goods are now delayed or undeliverable, those contracts have a specific current status.
Inventory is in transit and at risk. If a company has inventory currently in transit through or near the Strait, that inventory has a specific current value at risk.
Fuel hedges may no longer be effective. If a company has designated fuel or oil price hedges as accounting hedges under ASC 815, the price spike and supply disruption may have disrupted the expected hedge relationship.
None of these is a hypothetical future risk as of today. Each has a specific current fact pattern that requires an ASC 450 assessment.
Contingency #1: War-Risk Insurance Claims on Vessels in the Strait
For companies that own, operate, or charter vessels, the first contingency is the most immediately concrete. War-risk insurance is a separate insurance category from standard hull and machinery or protection and indemnity coverage. It covers physical damage and loss arising from acts of war, hostile acts, or warlike operations.
The ASC 450-20 analysis for a war-risk insurance claim has two sides: the potential loss on the vessel or cargo, and the potential recovery from the insurance claim.
For the loss side: if a vessel has been damaged or lost in the Strait escalation, the loss is probable and the amount is estimable (insured value or replacement cost). ASC 450-20-25 requires accrual. If a vessel is at risk but has not yet been damaged, the loss is reasonably possible and requires disclosure, not accrual, as long as the probability of damage remains below probable.
For the insurance recovery side: ASC 450-30-25-1 and ASC 410-30 by analogy establish that an insurance recovery should be recognised as an asset only when the recovery is probable and the amount can be reasonably estimated. An accrued loss cannot be net against an expected insurance recovery unless both the loss and the recovery are probable and the recovery is contractually certain. The war-risk policy terms matter: some policies have exclusions for government-ordered actions or for specific Iranian territorial waters. If the policy has a valid exclusion, the recovery may not be probable.
For companies with vessels currently in or near the Strait that have not yet been damaged, the ASC 450 analysis is: is it probable that a loss will occur? As of today, the IMO has urged all ships to halt transit. At least four tankers have already turned back. The US and Iranian forces are actively exchanging strikes. The probability of damage for a vessel attempting to transit right now is higher than it was one week ago. Whether that probability crosses the probable threshold depends on the specific vessel's location, its route, and the current state of hostilities at the time the financial statements are issued.
For Q2 2026 balance sheet purposes, the relevant question is the probability as of June 30, 2026. June 30 preceded the July 7-8 escalation. The analysis as of June 30 may be different from the analysis today. But the July 7-8 events may constitute a subsequent event providing evidence about conditions that existed at June 30, if the deterioration in the MOU was already underway before quarter-end.
Contingency #2: Force Majeure Disputes on Supply Contracts Disrupted by the Crisis
Force majeure provisions in supply contracts excuse a party from performance when performance is made impossible or commercially impracticable by an unforeseeable event outside the party's control. Whether the Strait of Hormuz escalation triggers force majeure under a specific contract depends on the contract's specific force majeure definition, which varies materially across contracts and governing law.
The ASC 450-20 analysis for a force majeure dispute has several components.
If the company is the buyer and a supplier is claiming force majeure to excuse non-delivery: the company may have a loss because it did not receive goods it contracted for and now must source them elsewhere at higher cost. Whether that potential replacement cost is a contingent loss depends on whether the force majeure claim is valid and whether the company has legal recourse against the supplier. If the replacement cost is probable and estimable, it should be accrued. If the force majeure claim validity is disputed and the outcome is uncertain, disclosure at the reasonably possible level is appropriate.
If the company is the seller and is claiming force majeure to excuse non-delivery: the company may have a contingent liability from its own customer's claim that the force majeure invocation was improper. The customer may seek damages for the breach. If that customer claim is probable and estimable, the company may need to accrue a loss contingency.
The specific analysis must be contract-by-contract. A company with five supply contracts where delivery was to come through the Strait needs to assess each contract's force majeure definition, the validity of any force majeure claim by either party, and the probable financial consequence of a dispute.
For Q2 2026 purposes: the relevant question is whether any supply contract disruptions occurred before June 30, 2026. If the Strait was still nominally open under the MOU through June 30 (the attacks began July 7), then most force majeure disputes will be subsequent events rather than Q2 balance sheet items. The exceptions are any contracts where delivery was already delayed or at risk due to earlier phases of the Iran conflict (which began in February 2026).
For the Q2 footnote: where force majeure disputes are reasonably possible based on current facts, the nature of the dispute and an estimate of the range of possible loss should be disclosed. Where the dispute is remote, no disclosure is required.
Contingency #3: Stranded Inventory in Transit When Does It Become a Loss?
Inventory in transit is a specific category of asset that requires careful ASC 450 analysis when a major shipping disruption occurs. The accounting question has two distinct components: the risk of physical loss or damage, and the risk of delayed receipt creating excess carrying cost or obsolescence.
For physical loss or damage: if inventory is on a vessel that is in or near the Strait and that vessel is attacked or diverted, the inventory may be lost, damaged, or significantly delayed. If loss or damage is probable and estimable, ASC 330-10-35-1 (lower of cost or net realizable value) applies in conjunction with ASC 450. A loss equal to the carrying value of the inventory may need to be recognised.
For delayed receipt: if inventory is diverted to the Cape of Good Hope route (adding 10 to 14 days of transit time) and will arrive after its anticipated sale date or after its customer's contractual delivery deadline, the inventory may suffer impairment if its NRV has decreased. Seasonal inventory, perishable goods, or goods subject to a firm contract with a specific delivery deadline are particularly at risk of NRV impairment from route diversion.
The insurance dimension applies here as well. Cargo insurance typically covers physical loss or damage but not delay. A company whose inventory is delayed by rerouting but not physically damaged has no insurance recovery available for the delay cost. That delay cost (storage, demurrage, rebooking fees, expedited air freight to meet customer commitments) may itself be a loss contingency if it is probable and estimable.
For Q2 2026 balance sheet purposes: inventory in transit as of June 30, 2026, that was routed through the Strait and that is now delayed or at risk as a result of the July 7-8 escalation represents a subsequent event. If the July 7-8 events provide evidence that the transit was already in danger as of June 30 (because tensions were escalating in late June), it may be an adjusting subsequent event affecting the Q2 financial statements. If the transit was safe as of June 30 and the risk arose only from the July 7-8 attacks, it is a non-adjusting subsequent event that requires footnote disclosure under ASC 855-10-50-2 if it is material.
Contingency #4: Fuel Hedge Ineffectiveness When the ASC 815 Cash Flow Hedge Fails
Companies that hedge their fuel or crude oil price exposure using derivative instruments and that have designated those hedges as accounting cash flow hedges under ASC 815-20 face a specific technical issue when oil prices spike or when the hedged exposure itself changes.
The ASC 815 cash flow hedge relationship requires ongoing effectiveness: the hedging instrument must be highly effective at offsetting changes in cash flows attributable to the hedged risk. For a company that hedged fuel costs using WTI crude oil futures, the 6% price spike on July 8 is itself not a hedge effectiveness problem. A price move in the direction of the hedge does not cause ineffectiveness. What can cause ineffectiveness is a change in the hedged exposure, a change in the relationship between WTI futures and the actual fuel being consumed, or a mismatch in the timing or quantity of the hedged transaction.
Four specific situations create ASC 815 contingency considerations in the Strait escalation context.
First: if the company has a fuel hedge tied to specific shipments that are now being rerouted or cancelled, the hedged transaction may no longer be probable of occurring as originally specified. Under ASC 815-30-40-4, if a hedged forecasted transaction is no longer probable, the hedge must be discontinued and any deferred losses in AOCI must be reclassified to earnings immediately. That reclassification is a loss that should be assessed for Q2.
Second: if the hedged transaction will still occur but at a different quantity or timing than originally specified, partial discontinuation may be required. For example, a company that hedged its fuel consumption assuming Strait transit at certain costs and now faces a Cape of Good Hope route with different fuel consumption may have a quantity mismatch in the hedge relationship.
Third: for companies with oil price swaps or commodity collars tied to specific Gulf crude grades, the disruption in Gulf crude availability may affect the basis relationship between the hedge and the actual commodity being purchased. Significant basis divergence causes hedge ineffectiveness.
Fourth: where hedge ineffectiveness is assessed and quantified, the ineffective portion of the hedge gain or loss must be recognised currently in earnings under ASC 815-20-35. This is not a contingency in the traditional ASC 450 sense but is an immediate income statement item that the Q2 provision and 10-Q must reflect.
What Is the "Probable" vs "Reasonably Possible" Threshold Under ASC 450 and How to Apply It Today
The probable/reasonably possible distinction is the single most consequential judgment in the ASC 450 analysis. Getting it wrong in either direction has financial statement consequences: accruing when the loss is only reasonably possible overstates liabilities, and failing to accrue when the loss is probable understates them.
The framework does not offer a numerical percentage test. The PwC Business Combinations Guide and the Deloitte ASC 450 practical guide both confirm that probable is generally understood to mean that the future event is likely to occur, which most practitioners interpret as a greater-than-70% or greater-than-75% likelihood. Reasonably possible covers the range from more than remote to less than probable.
Applying this to the Strait of Hormuz situation today requires company-specific facts, not a market-wide assessment.
A company whose vessel is currently in the Strait attempting to transit, where Iranian forces have attacked three vessels in the last 48 hours and the IMO has urged all ships to halt, faces a higher probability of damage than a company whose vessel turned back before the attacks began. The same event produces different probability assessments for different companies based on their specific position.
A company with a supply contract for goods from a Gulf producer, where the producer has not yet invoked force majeure and goods are still being produced, faces a different probability from a company whose goods were on a vessel already attacked.
The assessment must be made as of the financial statement issuance date, with consideration of subsequent events. For Q2 2026 10-Qs filed in August, the assessment must incorporate all information available through the filing date, including the July 7-8 escalation and whatever developments occur between now and August.
The documentation requirement is critical. ASC 450-20-50-9 requires that where no accrual has been made for a loss contingency that is at least reasonably possible, the footnote must explain the reason for not accruing and provide the estimated range of loss. "We are unable to estimate the loss" is permissible only where the estimate is genuinely impossible, not where it is merely inconvenient to produce. For stranded inventory values, insurance policy limits, and known contract damages, the values are generally estimable and a range should be provided.
What Does Your Q2 10-Q Need to Disclose vs Accrue for Each Contingency?
The disclosure and accrual decisions for each of the four contingencies are summarised here, recognising that the specific outcome depends on company-specific facts.
War-risk insurance claims. If damage has occurred: accrue the net loss (loss less probable insurance recovery). If damage has not occurred but is probable for a specific vessel: accrue the expected loss less probable recovery. If damage is reasonably possible but not probable: disclose the nature of the contingency and the estimated range. The disclosure should confirm that war-risk insurance coverage exists and whether its limits are sufficient to cover the expected loss. Do not net the insurance recovery against the loss in disclosure unless both are probable.
Force majeure disputes. If a dispute has arisen and a specific customer or supplier claim is probable: accrue the estimated damages. If dispute is reasonably possible: disclose the nature of the contract, the nature of the force majeure claim, and the estimated range of loss. Confirm whether the force majeure provision in the specific contract clearly covers the Strait escalation under its governing law.
Stranded inventory. If physical loss is probable and estimable: write down to zero (or expected recovery) under ASC 330 and accrue the loss. If delay is causing NRV impairment and the impairment is probable and estimable: write down to NRV. If the inventory is delayed but NRV has not been impaired: disclose the delay, the estimated costs of rerouting, and whether any insurance recovery applies. Subsequent event disclosure under ASC 855 may be required where the inventory was safe at June 30 but at risk as of the filing date.
Hedge ineffectiveness. If a hedged forecasted transaction is no longer probable: reclassify AOCI losses to earnings immediately in the period in which the probability changes. This is not a disclosed contingency but an earnings charge. If the timing or quantity of the hedged transaction has changed but the transaction is still probable: reassess the hedge relationship for effectiveness and recognise the ineffective portion in earnings. Disclose the discontinuation or modification of the hedge in the derivatives and hedging footnote.
A Q2 2026 ASC 450 Contingency Checklist for Companies With Middle East Exposure
This checklist is for the Q2 2026 close process. Complete before the Q2 financial statements are finalised.
Step 1: Inventory your specific Strait exposures.
List every vessel owned, chartered, or used by the company that was in or transiting the Strait of Hormuz between July 1 and the financial statement issuance date. List every supply contract calling for delivery of goods shipped through the Strait. List every inventory shipment currently in transit from the Gulf region. List every fuel or commodity price hedge designated under ASC 815.
Step 2: For each exposure, determine whether a loss-causing event has already occurred.
Has any vessel been damaged or diverted involuntarily? Has any supply contract been disrupted, with a formal force majeure notice issued or received? Has any inventory been physically damaged or had its NRV reduced? Has any hedged transaction been cancelled or materially modified?
Step 3: For each loss-causing event, assess the probability threshold.
Apply the probable/reasonably possible/remote framework to each specific loss-causing event with reference to current facts. Document the conclusion and the basis for it. Get legal counsel input on force majeure disputes and insurance claim validity.
Step 4: For probable losses, estimate the loss and determine whether accrual is required.
Obtain the insurance policy limits and war-risk coverage terms. Obtain the contract damages provisions. Obtain the current carrying value of at-risk inventory. Estimate the range of loss for each probable contingency.
Step 5: For reasonably possible losses, draft footnote disclosure.
Each reasonably possible contingency requires a footnote describing the nature of the contingency, the estimated range of loss, and the basis for concluding that accrual is not required.
Step 6: Assess subsequent events.
Determine whether the July 7-8 escalation (which occurred after June 30) provides evidence of conditions that existed at June 30 (adjusting subsequent event) or constitutes a new event (non-adjusting subsequent event requiring disclosure under ASC 855-10-50-2).
Step 7: Coordinate with external auditors.
The four contingencies identified in this checklist involve significant judgment. Brief the audit engagement team on each specific contingency before the Q2 review procedures begin. Obtain auditor concurrence on the probable/reasonably possible conclusions before finalising the financial statements.
Frequently Asked Questions
What is an ASC 450 loss contingency?
An ASC 450-20 loss contingency is an existing condition involving uncertainty as to possible loss that will be resolved when future events occur or fail to occur. If the loss is probable (likely to occur) and the amount can be reasonably estimated, the loss must be accrued as a charge to income and a liability on the balance sheet. If the loss is at least reasonably possible but not probable, it must be disclosed in the footnotes with an estimate of the range of loss if estimable.
Does the Strait of Hormuz crisis require an ASC 450 accrual?
It depends entirely on company-specific facts. Companies with vessels damaged or at high probability of damage in the Strait, with supply contracts disrupted by the crisis, with inventory in transit at risk of loss, or with fuel hedges affected by the disruption need to apply the ASC 450 framework to each specific situation. A general market event does not automatically trigger an accrual. The accrual is triggered when a loss-causing event has occurred and the loss is probable and estimable for a specific company's specific asset or obligation.
What is the difference between "probable" and "reasonably possible" under ASC 450?
Probable means the future event is likely to occur, generally interpreted as greater than approximately 70-75% probability. Reasonably possible means the chance of occurrence is more than remote but less than likely. Both require footnote disclosure where material. Only probable losses require accrual if also reasonably estimable. Remote contingencies require neither accrual nor disclosure.
Does war-risk insurance recovery offset an ASC 450 loss?
Not automatically. An insurance recovery is recognised as an asset under ASC 450-30 (by analogy to ASC 410-30) only when the recovery is also probable and the amount is reasonably estimable. The loss and the recovery must be assessed independently. If the loss is probable but the recovery is uncertain (because the policy terms or claim validity is in dispute), the full loss should be accrued and the insurance recovery should not be netted against it until recovery is also probable.
How does force majeure interact with ASC 450 contingency accounting?
A force majeure event may give rise to two types of ASC 450 contingencies: a contingent loss for the company if it is the non-performing party and the force majeure claim is disputed, and a contingent loss for the company if it is the receiving party and must source goods elsewhere at higher cost. The analysis is contract-specific and depends on the force majeure definition, the governing law, and the probability that a dispute will arise or succeed.
Key Takeaways
- The Strait of Hormuz escalation creates four specific ASC 450 loss contingency assessments distinct from the risk factor and MD&A disclosure obligations covered in yesterday's post: war-risk insurance claims, force majeure disputes, stranded inventory losses, and fuel hedge ineffectiveness.
- ASC 450-20 requires accrual of a loss contingency when the loss is probable (likely to occur) and the amount is reasonably estimable. It requires footnote disclosure when the loss is at least reasonably possible, even if not accrued. Remote contingencies require neither.
- For war-risk insurance claims: accrue the net loss (loss less probable insurance recovery) if damage has occurred or is probable for a specific vessel. Insurance recovery is only netted against the loss when the recovery is itself probable, not merely possible.
- For force majeure disputes: assess contract by contract. If a dispute has arisen and specific damages are probable, accrue. If the dispute is reasonably possible, disclose the nature and range. The force majeure definition and governing law determine whether the Strait escalation triggers the clause.
- For stranded inventory: assess physical loss under ASC 330 (lower of cost or NRV) and separately assess delay costs. Insurance covers physical loss but not delay. Route diversion costs (Cape of Good Hope rerouting) may themselves be a loss contingency if probable and estimable.
- For fuel hedge ineffectiveness: if a hedged forecasted transaction is no longer probable, reclassify AOCI losses to earnings immediately under ASC 815-30-40-4. This is an immediate income statement charge, not a disclosed contingency.
- The July 7-8 escalation is a subsequent event relative to the June 30, 2026 balance sheet. It may be an adjusting subsequent event (ASC 855 Type 1) if it provides evidence of conditions that existed at June 30, or a non-adjusting subsequent event (ASC 855 Type 2) if it constitutes a new condition that arose after June 30.
- All four contingency assessments require company-specific analysis, legal counsel input on contract and insurance matters, documentation of the probability conclusion, and coordination with external auditors before the Q2 financial statements are finalised.
