Sometimes the financial implications of events, such as lawsuits, are not known with certainty at the time of the completion of the financial statements. In these cases, a contingent loss or a contingent gain exists that may require disclosure or accrual in the financial statements.
Accounting for Contingent Losses and Contingent Gains
- A contingent loss would be accrued if it is likely and a reasonable estimate can be made of the loss. (3290.12)
- Where the likelihood of a contingent loss is not determinable, or where an amount is not determinable, only note disclosure would be provided. (3290.17)
- No disclosure is required of losses that are unlikely, however note disclosure may be desirable where the potential impact of a contingency could be significant.
- Contingent gains are never accrued, but note disclosure should be provided for any likely amounts. (3290.18,.19)
- A loss would be considered likely if there is greater than a 50% chance of the loss occurring.
The amount would be considered reasonably estimatable if the organization can establish a range for the probable amount of the loss. If no amount within the range is considered a better estimate, the low amount in the range would be accrued, and note disclosure would be provided for the remaining possible loss.
Note Disclosure for Contingent Losses and Gains
The notes should describe the nature of contingent losses and gains and any estimate of the amount or a statement to the effect that amounts cannot be estimated. (3290.23) Any note should preferably be referenced to the statement of financial position. In the case of contingent losses, this reference is usually made at the accounts payable amount.