Loss contingency
Loss contingency is a situation, or set of circumstances involving uncertainty as to possible loss to an enterprise. For example, a company that is being sued for copyright infringement would have a loss contingency. The uncertainty as to the company's liability to the copyright owner will be resolved when the lawsuit is concluded. Unit then, the company has some potential liability to the copyright owner. Loss contingencies are not limited to infringement claims. In fact may reach all aspects of intellectual property law, such as patent interference actions, antitrust claims and contractual disputes affecting trade secrets[1].
If a loss contingency is only reasonably possible, or if the loss is probable but the amount cannot be reasonably estimated, then the company is not required to occurre the loss contingency. Its nature must be disclosed in a footnote. That disclosure must provide an estimate of the possible loss or range of loss or state that such an estimate cannot be made[2].
Three areas within the range of potential loss
The amount of the loss can be reasonably estimate. When a loss contingency exists for a company, the likelihood that the future event will confirm the loss can vary over a wide range. We uses the terms probable, reasonably, possible and remote to identify three areas within this range. These terms are defined as follows[3]:
- Probable
The future event is likely to occur. For contingencies, the future event or events are more likely than not to occur. In addition, for contingencies related to pending or threatened litigation and unasserted claims the future confirming event or events are those likely to occur.
- Reasonably possible
The chance of the future confirming event or events occurring is more than remote but less than probable. Loss has been incurred or it is probable that the loss has occurred but the amount cannot be reasonably estimated.
- Remote
The chance of the future event or events occurring is slight.
Loss contingencies arising after the date of financial statements
A loss contingency is classified as probable or reasonably possible. After the balance sheet date but before the issuance date of the financial statements, may have to be disclosed to avoid misleading financial statements. If professional judgment deems this type of disclosure necessary. The disclosure shall contain:
- Description of the nature of the loss contingency
- The range of possible loss, or
- Statement that no estimate of the loss can be made.
It may be desirable to disclose this type of loss contigency by supplementing the historical financial statements with pro forma statements[4].
Footnotes
| Loss contingency — recommended articles |
| Insured contract — Insured peril — Indemnity clause — Runoff Insurance — Loss Payee — Period of indemnity — Exemption clause — Franchise insurance — Assignment of claims |
References
- Gerrard M., (2007), Global Climate Change and U.S. Law, American Bar Association, Chicago.
- Ruppel W., (2010), GAAP for Governments, John Wiley & Sons, New Jersey.
- Thronson M.J., Roth G.S., Grossman J.D., (2018), Intellectual Property Legal Opinions, Aspen Publishers, New York.
- Williams R., Carcello J.V., (2008), GAAP Guide, CCH, Chicago.
Author: Karolina Urbańczyk
