Contingent liability

Definition

A contingent liability is a potential financial obligation that may arise depending on the outcome of a future event. It is not recorded in the financial statements unless it is probable and the amount can be reasonably estimated.

5 Must Know Facts For Your Next Test

1. Contingent liabilities are only reported in the financial statements if they are probable and the amount can be reasonably estimated.
2. Examples of contingent liabilities include lawsuits, product warranties, and environmental cleanup costs.
3. If a contingent liability is possible but not probable or cannot be reasonably estimated, it should be disclosed in the notes to the financial statements.
4. The evaluation of whether to record or disclose a contingent liability involves professional judgment.
5. The resolution of a contingent liability may result in either no cost, some cost, or significant expense.

Review Questions

• When should a contingent liability be recorded in the financial statements?
• What are some common examples of contingent liabilities?
• How should a company handle a contingent liability that is possible but not probable?

Related terms

currentLiability: A current liability is an obligation expected to be settled within one year or within the company's operating cycle.

provision: A provision is an amount set aside from profits to cover an anticipated future liability.

accruedExpense: An accrued expense is an expense that has been incurred but not yet paid or recorded at the end of an accounting period.