Question

What is a contingent liability? List the three categories of contingent liabilities. Our contingent liabilities recorded on a company’s books? Explain. What is the difference in accounting procedures for liability that is probable an estimate a book and one that is reasonably possible but not us to Mobil?

Answer 1

Contingent Liability:

Contingent Liability is that liability the occurence of which is contingent upon future uncertain event which is not in controllable by the entity

Categories of Contingent Liability:

As per US GAAP, there are 3 categories of Contingent Liabilities:

• probable: Those contingencies which are likely to occur and can also be reasonably estimated
• possible: Those contingencies which are not more likely to occur than not but at the same time can't be resorted to be unlikely either
• remote: Those contingencies which are not likely to occur

Treatment in Books of Accounts:

If the contingent liability is probable and the amount of economic benefit outflow is reasonable estimated, the loss is shown in the financial statements as a liability

If the contingent liability is reasonable, the same need not be recognized in the books of accounts. However a note stating the nature and possible impact of the liability should be disclosed in the notes to balance sheet

If the contingent liability is deemed to be remote, its neither disclosed nor recorded in the financial statements as liability

Hence the difference between accounting procedures for liabilty that is probable and reasonably estimated and liability that is reasonably possible is that the former will be recorded as liability and the book values are adjusted to the extent, while the latter cannot be recorded as liability and a mere disclosure is all that is required.