Question

What is a contingent liability?

Give an example of a contingent liability that is usually recorded in the accounts in current period even though it is Still a Contingent liability now (Not a liability).

Under what circumstances is a contingent liability disclosed only in the notes to the financial statements? Under what circumstances is a contingent liability not recorded in the accounts nor disclosed in the notes to the financial statements?

Answer 1

A contingent liability can be defined as that liability or a potential loss that may occur in the future depending on the outcome of a specific event. Examples of contingent liability can be Potential lawsuits, product warranties, pending investigation etc. It is a possible obligation that may or may not arise in future depending on how an event unfolds in future.

When liability is probable and the amount can be reasonably estimated, companies will record contingent liabilities in the accounts. e.g. When a company is in middle of any lawsuit and company's lawyer thinks that he can loose the case if other party has strong points and can win the case if he has strong points then in such cases of probability the amount of damage will be recorded in accounts of current period even though it is still a contingent liability now.

A loss contingency which is possible but not probable will not be recorded in the accounts as a liability and a loss. Instead, it will be disclosed in the notes to the financial statements.

A loss contingency which is remote i.e chances of occurence or happening of that event are very low or negligible will not be recorded in the accounts nor disclosed in the notes to the financial statements. For example, fighting a case or pending case in court where there are low chances of similar case to get successful or no similar case got successful.