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Contingency

A contingency is a possible future event whose outcome is uncertain, and in finance it usually refers to a potential gain or loss that depends on that event happening.

What Is a Contingency?

In finance, a contingency is a condition or situation that may or may not occur in the future. Its result depends on how some uncertain event turns out. The term appears most often in accounting, where a contingent liability is a possible obligation that comes from a past event and will only be confirmed if a future event happens. A common example is a lawsuit a company is defending. The company may have to pay damages, or it may win, and the outcome is not yet known.

How Contingencies Are Reported

Accounting standards require companies to treat contingencies according to how likely the outcome is. Under generally accepted accounting principles in the United States (ASC 450) and international standards (IAS 37), a loss is recorded in the financial statements when it is probable and the amount can be reasonably estimated. If the loss is only reasonably possible, the company usually discloses it in the notes without recording it. Remote possibilities generally need no reporting. Gains are handled more conservatively and are generally not recognized until they are realized.

Other Uses of the Term

The word also appears in other settings. A contingency reserve is money set aside by a company, fund, or budget to cover unexpected costs. In trading, a contingent order is an instruction that only takes effect if a specified condition is met, such as a price reaching a set level. A stop-loss order works this way, and so does a one-cancels-other order, where filling one order automatically cancels the other.

Why It Matters to Investors

Contingencies can affect how a company's financial position looks. A large potential loss that has been disclosed but not recorded may still weigh on future results. Investors often read the notes to financial statements in a company's annual report to see what contingencies it faces. Because the outcome is uncertain, estimates can change as new information arrives. Understanding that a contingency is a possibility rather than a certainty helps put these disclosures in context.

Updated October 26, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Contingent Liability

A contingent liability is a possible future obligation that depends on an uncertain event, such as a lawsuit. Its accounting treatment depends on how likely and measurable the cost is.

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) are the standardized rules that companies in the United States follow when preparing financial statements, so that results are consistent, comparable, and transparent to investors.

Financial Statements

Financial statements are standardized reports that show a company's financial position, performance, and cash flows over a period, typically including the balance sheet, income statement, and cash flow statement.

Stop-Loss Order

A stop-loss order is an instruction to a broker to sell a security automatically once its price falls to a specified level, intended to limit an investor's potential loss on a position.

Provision

A provision is an amount a company sets aside in its accounts to cover a probable future expense or loss whose timing or exact size is uncertain.