What does this mean in plain English? This comes into play when a set of circumstances that currently exist create uncertainty as to gains or losses which could result. An example of these contingent circumstances could include a potential lawsuit that could create a positive or negative result for the company issuing the financial statements. If you are still unclear on the concept, read here where we explain further in depth what a contingent liability is.
Some of the tricky circumstances surrounding ASC 450 is the language of when these need to be disclosed. The chances that these happen must pass a certain threshold in order to be disclosed, which can be hard to measure objectively. This uses a lot of what auditors call professional judgment and requires many factors including past experience. The three categories in which a contingency for gain or loss fall into are below:
- Probable – The event is likely to occur
- Reasonably possible – Less than likely but more than remote
- Remote – Slight
The company must accrue the contingency when the event is probable and can be “reasonably estimated.” If the event is only reasonably possible, the company must still disclose this in the notes to the financial statements and describe the “nature of the contingency” and if possible the extent of the gain/loss.
Accounting made easy, for FREE!
Access the contact form and send us your feedback, questions, etc. We are always welcome to help someone out. You can also contact us if you wish to submit your writing, cartoons, jokes, etc. and we will consider posting them to share with the world! The Facebook and LinkedIn groups are also good areas to find people interested in accounting like yourself, don’t hesitate to join as everyone of all levels are welcome to become part of the community.