Final answer:
In accounting, a remote loss contingency that cannot be estimated is not recorded in financial statements, but if material, it may be disclosed in the notes to the financial statements. A bank, as an example, must plan for loan defaults and reflect this risk in its balance sheet, but disclose unexpected significant defaults.
Step-by-step explanation:
When dealing with loss contingencies that are considered remote, and for which the amount of loss is not estimable, generally accepted accounting principles (GAAP) do not require them to be reported in financial statements. Since the likelihood of the event occurring and causing financial harm is low, disclosure in the financial statements is typically not warranted. However, if the potential loss could be material and its nature is such that it would be informative to the readers of financial statements, a company may provide disclosure in the notes to the financial statements, even though it is not quantifiable financially.
For instance, a well-run bank plans ahead for situations where loan defaults might occur. They will factor in a certain percentage of borrowers who might not repay their loans. The bank's balance sheet will reflect a certain level of riskiness to account for these potential loan defaults. Still, if the actual number of defaults greatly exceeds the estimations, this will significantly impact the bank's financial position, which is a scenario that would likely be disclosed to inform users of the financial statements.