Accounting for Contingencies for Not-for-Profits

The Global Risks Report 2026, published by the World Economic Forum, identifies geoeconomic confrontation as the top global risk for the year. Interstate conflict, extreme weather events, societal polarization, and the spread of misinformation and disinformation also rank high on the list. Together, these risks create significant uncertainty across the global economy, technology, society, and the environment, all of which can affect not-for-profit organizations.

For not-for-profits, that uncertainty can give rise to contingencies that may result in potential losses or gains. Understanding how to evaluate and account for those contingencies is important to presenting clear, accurate financial statements.

What Is a Contingency?

A contingency is an existing condition, situation, or set of circumstances involving uncertainty that, when resolved, may result in a gain or loss. Contingencies that may result in the loss or of an asset or the incurrence of a liability are called loss contingencies. Contingencies that may result in the acquisition of an asset or the reduction of a liability are called gain contingencies. However, loss contingency guidance applies only when no other applicable accounting guidance governs the matter.

When to Record an Estimated Loss

A loss contingency does not develop into an actual loss until a particular future event occurs. As a result, accounting for a loss contingency depends on the likelihood that the future event will occur. Under the accounting guidance, that likelihood falls into one of three categories:

• Probable – likely to occur
• Reasonably possible – more than slight but less than likely
• Remote – slight

Depending on which category applies, a loss contingency may need to be accrued, disclosed, or neither.

An estimated loss from a loss contingency should be accrued when both of the following conditions are met:

• Information available before the financial statements are available to be issued indicates that it is probable that a loss has been incurred at the financial statement date. This implies that one or more future events will confirm the existence of the loss as of that date.
• The amount of the loss can be reasonably estimated.

If a loss becomes probable in one period but cannot yet be reasonably estimated, it should be accrued in the period when the amount can be reasonably estimated. Prior periods should not be adjusted.

When Disclosure May Be Required Instead

In some cases, disclosure is appropriate even when accrual is not. A loss contingency generally should be disclosed instead of accrued if:

• It is probable that a loss has occurred, but the amount cannot be reasonably estimated, or
• It is reasonably possible, rather than probable, that a loss has occurred.

This disclosure helps readers understand the nature of the uncertainty and the potential financial impact, even when the amount is not yet well enough known to be recorded.

Common Loss Contingencies for Not-for-Profits

Not-for-profit organizations can face a range of uncertainties that may give rise to loss contingencies. Some of the more common examples are as follows.

Noncompliance With Donor Restrictions

Donors may place restrictions on contributions, such as requiring the organization to use it for a particular program within a nonprofit, or for capital improvements or purchase of specific equipment, or for scholarships or financial aid for certain groups of people that the organization serves.  If the organization does not comply with those restrictions, it may need  to reimburse the donor for prior donations, or return the asset

If it is probable that a restricted donation will need to be repaid and the amount can be reasonably estimated, the not-for-profit should accrue a contingent liability.

Potential Loss of Tax-Exempt Status

A not-for-profit may have a loss contingency that requires accrual or disclosure if there is a problem with its tax-exempt status due to noncompliance with tax laws like engaging in activities that may jeopardize its tax exempt status , such as excessive lobbying, political activity, or generating substantial unrelated business income, and failure to file IRS form such as Form 990 for three consecutive years, which can result in automatic revocation. If it is probable that tax-exempt status will be lost, and the amount of loss (such as taxes, penalties, or interest) can be reasonably stated the loss contingency should be accrued in the financial statements.

Litigation, Claims, and Assessments

Pending or threatened litigation, as well as actual or possible claims and assessments, may also create a loss contingency.

A loss related to litigation, claims, or assessments should be accrued when all of the following conditions are met:

• The underlying cause of the litigation, claim, or assessment occurred on or before the financial statement date. This condition may be met even if the organization does not become aware of the matter until after year-end.
• The likelihood of an unfavorable outcome is probable. Factors to consider include the nature of the matter, the progress of the case, developments after the financial statement date but before issuance, the opinions of legal counsel, similar prior experiences, and the organization’s intended response.
• The amount of the loss can be reasonably estimated.

When the estimated loss is expressed as a range, the lowest amount in the range should be accrued unless another amount within the range is a better estimate. If it is reasonably possible that the actual loss could exceed the amount accrued, that additional exposure should be disclosed in the notes to the financial statements.

What About Gain Contingencies?

Contingencies that might result in gains should not be accrued until virtually certain. Doing so could result in recognizing revenue before it is realized. However, gain contingencies should be adequately disclosed in the notes to the financial statements when appropriate.

Why This Matters

Not-for-profits operate in an environment shaped by economic volatility, regulatory uncertainty, operational risk, and public scrutiny. In that environment, contingencies are not unusual. What matters is whether they are identified early, evaluated carefully, and accounted for in a way that reflects the organization’s actual financial position.

A clear understanding of the rules governing accruals and disclosures can help not-for-profit organizations provide more transparent financial reporting and better inform boards, donors, grantors, and other stakeholders.

For help evaluating and accounting for contingencies, connect with a CBIZ professional