Accounting Dictionary

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Contingent Loss

Definition: A contingent loss is one that may arise depending upon whether an event occurs at some point in the future. If you can reasonably estimate the amount of the contingent loss and it is probable that the loss will occur, then you should record the loss in the accounting records. If the loss event is only reasonably possible, then do not record the loss in the accounting records; instead, describe the situation in the notes accompanying the financial statements. If the probability of the loss event occurring is remote, then it is not necessary to record or describe the event.

You should assess the probability of contingent losses on a regular basis to see if they have become probable. When you classify a loss probability as probable, then you should create a provision for it in the period in which you increased its probability to the "probable" classification.

It is useful to document why a contingent loss is probable or not, if only to defend your position when it is examined as part of an annual audit.