Question

Explain the definition of contingent liabilities. Where are the contingent liabilities disclosed in the financial reports?

Answer 1

Answer ;

A contingent liabilities is a liabilty that may or may not occur , depending on the outcome  of an uncertain event. As per GAAP a contingent liability is defined as any potential future loss that depends on a " triggering event "to tun into an actual expenses.The most common example of contingent liability is a product warranty.

Recoding of contingent liability

According to GAAP contingent liability can be broken down into three categories.The first category is " high probability " contingency ,it means probability of of liability arising is more than 50 %and amount associated with it can be estimated with reasonable accuracy.Such events are recorded as an expenses on the income statement and liability on the balance sheet.

A " medium probability" contingency is one that satisfies either but not both of the condition of a high probability of contingency.Thease liabilities must be disclosed in the footnotes of the financial statement.

Contingent liability that will not fall into categories mentioned above are considered " Low probability".The likelihood of a cost arising due to these liabilities is very low and therefore not required to report in financial statements.