Thread: Contingent Liability Accrual - need help

I am have been looking at a number of filings and I have a question about accruals. What is happening from an accounting perspective when a company states "we consider a loss from this lawsuit to be probable, and we have accrued $240,000 the amount of the agreed settlement"? HDY 2009 10-K

OR

"Additional contingent obligations, other than with respect to our existing operations, include potential product liability claims for products manufactured and sold before the disposal of our discontinued industrial segment in fiscal year 1989 and for guarantees of certain obligations of former subsidiaries. We have provided an accrual at June 30, 2009 related to the Beldray Lease Guarantee, as discussed above." from here

Are these companies creating a liability by expensing the amount of the accrual on the income statement?

Here is my inclination to what is happening:
Amount of the probable loss = 240,000

Expenses 240,000 Dr.
Accrued Expenses 240,000 Cr.

When the probable loss is actually realized:

Accrued Expenses 240,000 Dr.
Cash 240,000 Cr.


Can someone confirm if this is actually true, or if I am wrong?

I just read FAS 5

8. An estimated loss from a loss contingency (as defined in paragraph 1) shall be accrued by a charge to income if both of the following conditions are met:
a. Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.
b. The amount of loss can be reasonably estimated.