Loss Contingency

A loss contingency is a condition existing at the balance sheet date that may result in a loss for a business, depending on whether some future event occurs. Common examples are pending or threatened lawsuits, product warranty claims, environmental clean-up obligations, guarantees of another party's debt and disputed tax assessments. It is another name for a contingent loss, which covers the topic in more depth.

Loss contingency is the wording used in US GAAP, in ASC 450, Contingencies. The standard classifies the likelihood of loss as probable, reasonably possible or remote:

• If a loss is probable and the amount can be reasonably estimated, the company accrues it, recording an expense and a contingent liability. If only a range can be estimated, the best estimate within the range is accrued, or the low end if no amount is better than another.
• If a loss is reasonably possible, or probable but not estimable, it is disclosed in the notes to the financial statements without being accrued.
• If it is remote, no disclosure is usually needed, except for certain guarantees.

Under IFRS, IAS 37 uses different words: a provision is recognized when an outflow is more likely than not, and other possible obligations are disclosed as contingent liabilities. The treatment of a loss contingency is the opposite of a contingent gain, which is not recognized until realized, reflecting accounting's caution toward uncertain gains.