A contingency is a potential occurrence of a negative event in the future, such as an economic recession, natural disaster, fraudulent activity, terrorist attack, or a pandemic. In finance, managers often attempt to identify and plan using predictive models for possible contingencies that they believe may occur.

What are tax contingencies?

Those tax contingencies (or tax reserves) are estimates of additional taxes the company may be required to pay in the future (Graham, Raedy, & Shackelford, 2012).

What Is risks and contingencies?

Risk contingency is a plan for handling a risk if it occurs. This doesn’t reduce the probability of the risk occurring but reduces the impact should it occur.

Why are contingencies important?

“The purpose of any contingency plan is to allow an organization to return to its daily operations as quickly as possible after an unforeseen event. The contingency plan protects resources, minimizes customer inconvenience and identifies key staff, assigning specific responsibilities in the context of the recovery.”

What are gain and loss contingencies?

Gain Contingencies: a claim or right to receive an asset or the reduction in a liability. Loss Contingencies: a reduction in the value of an asset or an increase to a liability based on the outcome of a future event. Examples include obligations under a manufacturer’s warranty or a negative outcome from litigation.

What is a tax cushion?

Test accuracy of tax accounts through any changes in the “tax reserves for additional tax assessments.” This reserve is the item that most companies refer to as the “tax cushion.” In reality, it is the liability for tax exposures. Any differences in this reserve should be reconciled.

What are buyer contingencies?

A home sale contingency gives the buyer a specified amount of time to sell and settle their existing home in order to finance the new one. This type of contingency protects buyers because, if an existing home doesn’t sell for at least the asking price, the buyer can back out of the contract without legal consequences.