Question

Contingent liabilities abound in the real world. Life and health insurance companies and their stockholders wonder how big the cost of diabetes, Alzheimer’s, and AIDS really are and what damage they might do in the future.

Why do you think most companies disclose but do not record contingent liabilities?

Answer 1

Liabilities which are depending on the happening of future course of action and events are called contingent liabilities.

To record contingent liabilities two main features must have to be considered.

1) Estimation of the value of contingent liabilities

2) Possibility of occurrence.

If it is possible to estimate the value of contingent liability and along with that if, the chances of occurring such event is more than 50% then as per GAPP, such contingent liabilities are recorded and reflected in the balance sheet .

Generally probable contingent liability which are estimated only recorded in the balance sheet.

Possible contingent liability are only shown in the footnotes because there is no guarantee of occurrence .

Remote liability are not at all disclosed due to very rare chances of occurrence.

Most of the companies may have contingent liabilities which are possible but not probable and not estimated , for that reason they disclose it in foot notes but not reported in the balance sheet .

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