Improving consistency in interpreting SFAS 5 probability phrases

Statement of Financial Accounting Standard No. 5, Accounting for Contingencies (SFAS No. 5), relies on verbal probability phrases to guide recognition or disclosure decisions for loss contingencies. One of the challenges facing accountants is that verbal probability terms are vague and may have multiple meanings; thus, different accountants may interpret the same probability phrase differently. Given this background, our study addresses the difficulty of interpreting verbal probability phrases and explores a simple way to improve judgment quality. Evidence from our experiment suggests that supplementing verbal probabilities with their corresponding numerical values reduces interpersonal variability in interpreting SFAS No. 5 terms.