Explain “gain contingency”.
Explain “gain contingency”.
MEANING OF 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
ANSWER :-
Gain contingencies, or the possible occurrences of a gain on a claim or obligation that involves the entity, are reported when realized (earned). If a specific event that can cause the gain occurs, and the gain is realized, then the gain is disclosed. If the gain is probable and quantifiable, the gain is not accrued for financial reporting purposes, but it can be disclosed in the notes to financial statements. If the gain is not probable or its amount cannot be reasonably estimated, but its effect could materially affect financial statements, a note disclosing the nature of the gain is also disclosed in the notes. Care should be taken that misleading language is not used regarding the potential for the gain to be realized. The disclosure of gain contingencies is affected by the materiality concept and the conservatism constraint.
The assessment of whether a gain is realizable requires significant judgment and should include the evaluation of relevant factors including the following:
1.Whether there is a signed agreement or legally enforceable contract that stipulates the terms of the gain or settlement, and whether the settlement is subject to any pending or expected appeal
2.Whether the counterparty has the ability or wherewithal to pay the amount
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