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23.5 Gain contingencies
Publication date: 30 Nov 2023
us Financial statement presentation guide
ASC 450 indicates that contingent gains should not be recognized prior to the gain being “realized” or “realizable.”
A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization.
A realized gain is one where cash (or other assets, such as claims to cash) has been received without expectation of repayment. A gain is realizable when assets are readily convertible to known amounts of cash or claims to cash. We believe the recognition of a gain is appropriate at the earlier of when the gain is realizable or realized. The assessment of whether a gain is realizable requires significant judgment and should include the evaluation of relevant factors including the following:
- 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
- Whether the counterparty has the ability or wherewithal to pay the amount
As discussed in FSP 23.4.3, a claim for loss recovery (e.g., an insurance claim) generally can be recognized when a loss event has occurred and recovery is considered probable. If the potential recovery exceeds the loss recognized in the financial statements or relates to a loss not yet recognized in the financial statements, such recovery should be evaluated under the gain contingency model.
23.5.1 Recoveries representing gain contingencies
An anticipated insurance recovery in excess of the recognized loss is considered a gain contingency and is subject to the guidance in ASC 450-30. Consistent with that guidance, a gain related to an insurance recovery should not be recognized until any contingencies relating to the insurance claim have been resolved (as the gain would not be realized until the related contingencies have been resolved).
AICPA TPA 5100.35 illustrates the treatment of a gain relating to an insurance recovery for an involuntary conversion of a building caused by a natural disaster that was not in dispute and that is realized after the date of the balance sheet but before the release of the financial statements.
Inquiry —A tornado virtually destroys a company's building on June 12, 20X0. The company has insurance and expects to be reimbursed for costs incurred to refurbish the building. The company's fiscal year-end is June 30, 20X0. On August 15, 20X0, prior to the issuance of the financial statements, the company receives a check in excess of the carrying amount of the building. Should the company recognize the gain on the involuntary conversion in the June 30, 20X0 financial statements?
Reply —No. Since the company was reimbursed for an amount in excess of the carrying amount of the building there was no loss to record on June 30, 20X0. The gain, which was received on August 15, 20X0, was a gain contingency on June 30, 20X0. Per FASB ASC 450-30-25-1, contingencies that might result in gains usually are not reflected in the accounts since to do so might be to recognize revenue prior to its realization.
This guidance does not explicitly address the recognition of the insurance proceeds equal to the carrying value of the destroyed building (the loss recognized in the financial statements), although the example implies that a receivable was recorded equal to the recognized loss by noting that “there was no loss to record” at the balance sheet date.
A gain contingency may be considered “realizable” prior to the receipt of cash, depending on the facts and circumstances. For example, a gain could be recorded at the balance sheet date if (1) it is acknowledged by the insurance company that a payment is due, (2) information is received prior to the release of the financial statements that will confirm the amount, and (3) collection is probable. However, if the existence of the claim is being disputed by the insurance company, there is a presumption that recoverability of the claim is not probable. Therefore, the amount would not be considered realizable and should only be recognized upon settlement of the dispute.
If the reporting entity expects a possible gain contingency, disclosure is required:
Adequate disclosure shall be made of a contingency that might result in a gain, but care shall be exercised to avoid misleading implications as to the likelihood of realization.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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