Gain contingency definition
/What is a Gain Contingency?
A gain contingency is an uncertain situation that will be resolved in the future, possibly resulting in a gain. The accounting standards do not allow the recognition of a gain contingency prior to settlement of the underlying event. Doing so might result in the excessively early recognition of revenue (which violates the conservatism principle). Instead, one must wait for the underlying uncertainty to be settled before a gain can be recognized.
Disclosure of a Contingent Gain
If a contingency may result in a gain, it is allowable to disclose the nature of the contingency in the notes accompanying the financial statements. However, the disclosure should not make any potentially misleading statements about the likelihood of realization of the contingent gain. Doing so might lead a reader of the financial statements to conclude that a gain would be realized in the near future.
Example of a Contingent Gain
Several examples of contingent gains are as follows:
Favorable legal settlement. A technology company sues a competitor for patent infringement, seeking $5 million in damages. While the case is ongoing, the potential $5 million settlement is considered a gain contingency until the court rules in the company’s favor or a settlement agreement is signed.
Potential sale of assets above book value. A retail company owns a building recorded on its books at $1 million. It is negotiating to sell the building for $1.5 million. The $500,000 potential gain is a gain contingency until the sale is finalized.
Tax refund claim. A manufacturing company determines it overpaid $200,000 in taxes for the prior year due to a calculation error. It files a claim for a refund, but the amount is treated as a gain contingency until the tax authority approves the refund.