“An existing condition, situation, or set of circumstances involving uncertainty as to
possible gain (gain contingency) or loss (loss contingency) to an enterprise that will
ultimately be resolved when one or more future events occur or fail to occur.”
(“Accounting for Contingencies,” Statement of Financial Accounting Standards No. 5
(Stamford, Conn.: FASB, 1975), par. 1).
Typical Gain Contingencies are:
Possible receipts of monies from gifts, donations, and bonuses.
Possible refunds from the government in tax disputes.
Pending court cases with a probable favorable outcome.
Tax loss carryforwards (Chapter 19)
Gain contingencies are not recorded.
Disclosed only if probability of receipt is high.
Contingent Liability. The likelihood that the future event will confirm the incurrence of a
liability can range from probable to remote. FASB uses three areas of probability:
Probable.
Reasonably possible.
Remote.
Common loss contingencies:
Litigation, claims, and assessments.
Guarantee and warranty costs.
Premiums and coupons.
Environmental liabilities.Promise made by a seller to a buyer to make good on a deficiency
of quantity, quality, or performance in a product.
Companies must consider the following factors, in determining whether to record a
liability with respect to pending or threatened litigation and actual or possible claims and
assessments.
Time period in which the action occurred.
Probability of an unfavorable outcome.
Ability to make a reasonable estimate of the loss.
If it is probable that customers will make warranty claims and a company can reasonably
estimate the costs involved, the company must record an expense.
