Question

Discuss uncertainty in liabilities and accounting for these liabilities.

Give examples of liabilities with uncertainty?

Answer 1

In general uncertainty in liabilities is nothing else but contingent liabilities.

A contingent liability is defined as a liability which may arise depending on the outcome of a specific event. It is a possible obligation which may or may not arise depending on how a future event unfolds. The Company itself has no control over the said amount.

It is not likely that an outflow of funds will be required to discharge the contingent liabilities.No reliable estimate can be made for the legal obligation. There is no prior precedence to enable the company to make such an estimate.

Accounting of Contingent Liability

Contingent liabilities are not generally recorded in the financial statements of a company. These obligations have not occurred yet but there is a possibility of them occurring in the future. So a contingent liability has no accounting treatment as such. A contingent liability is recorded only and only if the contingency is likely and the amount of the liability can be reasonably estimated. The liability may be disclosed in a footnote on the financial statements unless both conditions are not met.

Some Examples of Liabilities with uncertainity

Potential Lawsuits

Claims against the company not acknowledged as debts

Liquidated Damages

Pending Litigations

Prduct Warranties