A type of reserve that is set aside (out of retained earnings) as a cushion against possible future losses, foreseen and unforeseen. Contingency reserves are designed to help entities to offset losses that arise in the future in connection with their operations and business at large. For example, an insurance firm may form a contingency reserve to account for claims that may be beyond its usual coverage capacity due to some events or occurrences in the future.
Appropriation of funds out of surplus or retained earnings may impact dividends distribution (i.e., the burden will be shouldered by existing shareholders).
