Contingencies can be classified as loss or gain
contingencies. a Loss contingencies should be recognized
immediately in the financial statements if the loss is
probable and it can be reasonably estimated. If the loss is
probable, but the amount cannot be reasonably
estimated, then the loss must be disclosed in the notes
accompanying the financial statements. Gain
contingencies are recognized when realized. a In other
words, gain contingencies are recognized in the financial
statements when the funds are received. a Early
recognition of loss/expense and delayed recognition of
gains are based on the principle of conservatism in an
attempt to ensure that the financial statements are not
misleading. a An example of a loss contingency would be
pending litigation that the organization has known
responsibility for its role such as product liability lawsuit. a
An example of a gain contingency would be the actual
check received from defendants for successfully
defending against patent infringement.
