Question

You are getting ready to close the month and it is your responsibility as the accountant of a large architecture firm to analyze contingent liabilities. Discuss what types of contingent liabilities you might have, and what process you would go through to assess.

Answer 1

Contingent liabilities are not recognized in the financial statements however, included in notes to accounts. This is because contingent liabilities are not actual liabilities rather expected liabilities that may arise to an organization provided certain events not wholly within the control of the organization. In case of an architecture firm the following types of contingent liabilities may exist to the organization:

1. Pending litigations against the company in which the probability of outflow of economic resources are significantly low.
2. Expected loss that might arise in the future due to certain events not wholly within the control of the organization.     
3. Trade dispute that might result in outflow of economic resources.

The following process shall be undertaken to assess the contingent liabilities:

Firstly, the list of pending litigations shall be prepared. Each and every pending litigation shall be assessed to ascertain the possibility of loss of different litigations and the probability and possibility of outflow of economic resources due to such losses. In case of probability of losing is very slim but there is still a narrow possibility of loss then appropriate note shall be provided in the financial statements for contingent liabilities. It is also important to assess whether there is any trade dispute within the organization. Necessary contingent liabilities shall be showed in notes to accounts in this respect also.