Question: According to SFAS No. 5, only contingencies in which the possible future event may indicate an asset is impaired or a liability has been incurred on the balance sheet date are candidates for accrual or disclosure. For example, if a product is defective and customers who have used the product may take some action, a contingency exists despite the fact that no claims have been asserted.
I read the above example but I am not sure what it means when it says the customers are going to take some action against the company. I thought that if a lawsuit is filed against a company then those losses would be disclosed in the footnotes of the financial statements if the loss is likely to occur. Is that correct? I am not sure what the example means by take some action.
Reference - https://accounting-financial-tax.com/2009/11/accounting-standard-for-contingencies-an-overview/