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.

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.

An example of a contingent gain is the prospect for a favorable settlement in a lawsuit or a tax dispute with a government entity.

Related Courses

GAAP Guidebook 
IFRS Guidebook