Question

Why is it important that companies report contingent liabilities ?

Answer 1

Contingent Liabilities - Contingent Liabilities are those liabilities which are the potential obligations. Such potential obligation's outcome depend upon the results of happening of events in future and such events are not under the control of entity.

Reporting - Contingent Liability disclosure is based on set of certain guidelines such as Outcome of the liability must be probable (>50%) and such Liability can be Measured in value and Such Liability arises from the past events then such Liabilities will disclosed in financial statements otherwise Such liabilities are shown as foot note of balance sheet

Importance -

1) Contingent liability disclosure helps in getting to know about the future expenses

2) Some example like Warranty cost, Court case which effect the decision of investor in time of investing

3) Stakeholders like creditors, Investors decide on the basis of financial statements hence such material amount should be disclosed

4) Contingent liability also effects the going concern status. Since future liabilities may be very huge which could negatively effect the liquidity of entity.