Question

Explain the rules for the reporting of contingent liabilities. Why do we report contingent liabilities but not contingent gains?

Answer 1

Contingent Liability-

These are the less probable future obilgation which may be arised on occurance of particular event or events,when the probabily of occurence of event is less than 50% then such expected liability should be shown in contingent liability. The company must be in the situation at which it can't negate the liability the they will be showing contingent liabilty in books of accounts below the balance sheet.

Reporting of Contingent Liability-

The expected liability with chances of occurance of less than 50% and more than 0% should be reported in below the balance sheet of company for the year ending.

These liability may not be paid in future but due to conservatism approach of accounting these must be reported and when the chances of occurance increases to more than 50% then these liability should be reported in balance sheet as provision for particular expenses.

The example of contingent liabilty can be taken a court case by customer against company to provide a rough quality of product, then management should ask the lawyers about the occurance of liabilty against company, and amount involved is Suppose $100000 which seems that a liabilty of 40% seems then.$ 40,000 should be reported as provision for dispute settlement and $60,000 must be shown under the balance sheet as contingent liability.Since the chances of 100% liabilty is not became 0.

Reporting of contingent gain-

These gains are not reported because of conservatism approach has a veiw that realisation of money is difficult then payment of money for others, hence to be at safe side one should record all expected expenses and should not book expected profits,these profits or gians must be booked ,if the conditions of revenue recognition is satisfied.

Please comment for any specific or additonal explanation.

Thanks,