Contingency
What is a contingency?
A contingency is a potential event that might happen from now on. Investors and money managers recognize and prepare contingency plans for a broad scope of events that could impact them, including natural disasters, fear monger attacks or fraudulent activity. A contingent liability is a likely debt or commitment that might result from a negative event later on.
More profound definition
High level arrangements are required for companies to effectively endure negative possibilities, and insightful planning can moderate losses and damage. Companies that have effective contingency plans are bound to remain in operation after a negative event.
Contingency plans oftentimes incorporate procedures for returning a company to normal operations after a natural disaster, a scandal or a man-made event, and they almost consistently sketch out an advertising response to relieve any damage to the company's reputation. Contingency plans frequently incorporate money stores to guarantee a company has strong liquidity or insurance policies to cover losses.
The requirements for reporting contingent liabilities contrast in light of factors, for example, the dollar amount and likelihood that the contingency will happen. These requirements are intended to safeguard investors. Contingent liabilities are commonly uncovered in a companies customary commanded financial reports, either on the balance sheet or in the footnotes.
One job of corporate accountants is to work out the total amount of contingent liabilities a company could face — like lawsuits and product guarantees — however just those that can be sensibly estimated. This are reported on the balance sheet. Contingent liabilities without a total price tag may likewise be uncovered financial statements footnotes, or may not be reported by any stretch of the imagination.
Contingency clauses are contractual provisions that require a predefined event or action to occur for a contract to be viewed as substantial. One more term for a contingency clause is an escape clause. Contingency clauses empower one of the gatherings to cancel the contract on the off chance that the requirements are not met.
Contingency model
Contingency plans might include:
- A bank purchasing and introducing a backup generator in case of a power blackout.
- A financial management company keeping secure records offsite in case of theft or loss of data.
- A technology company building an offsite data center in case of a natural disaster.
A contingency clause would incorporate a buyer's offer to purchase a home contingent upon the home passing an inspection. Or on the other hand the buyer might expect that the seller fix issues that were listed on the inspection report as a contingency to purchasing the home.
Features
- Contingency plans can incorporate the purchase of options or insurance for investment portfolios.
- Companies and investors plan for different possibilities through analysis and carrying out protective measures.
- Banks must set to the side a percentage of capital for negative possibilities, like a recession, to safeguard the bank against losses.
- A contingency is a possibly negative event that might happen from here on out, like an economic recession, natural disaster, or fraudulent activity.
- An exhaustive contingency plan limits loss and damage brought about by an unexpected negative event.
