Wiss is your NY/NJ accounting and consulting firm with a global reach and
Contact Us: 973.994.9400
Back to Newsletters
The accounting for gain and loss contingencies differs under ASC 450, Contingencies.
Gain contingencies should not be recognized prior to when they are realized or realizable. For example, if your company was involved in a legal matter, the matter settles in your favor, you were entitled to a financial windfall, and there is no avenue for appeal by the third party, you would then record the gain contingency. However, if the other party has a right to appeal or take other action to dispute your windfall, you would generally not be allowed to record the gain contingency until the third party has exhausted their appeals or have no other avenue to dispute the windfall. We generally tell our clients to record a gain contingency once cash is received or when through written communication with the third party there is very strong evidence that the third party would not dispute the windfall.
There are special considerations for gain contingencies related to insurance recoveries. To the extent that recovery is probable the portion of an insurance claim that relates to recovery of an incurred loss may be recognized when the loss is recognized as long as there is no indication that the insurance company will not dispute the claim. Generally, claims in excess of the loss would only be recorded once the insurance provider acknowledges they will cover such gains. (Note insurance recoveries for lost revenues are not included in the special consideration for insurance recoveries)
A loss contingency, on the other hand, would be recorded when an event occurs and the loss associated with the event is probable and reasonable estimable. The FASB standards make it easier to record a loss contingency then to record a gain contingency. Disclosures are required for loss contingencies even when it is determined that it is not necessary to record the related loss. The standards however, do not require disclosures for loss contingencies when the likelihood of occurrence is remote.
We recommend that you consult with your accountants when you have potential gain/loss contingencies.