When Is A Contingent Liability Recorded.Contingent liabilities are possible future liabilities that will only become certain in the event of a future event. It is less certain that a contingent liability than a provision : the latter is expected to occur, a contingent liability might occur.
Contingent liabilities are not shown in the balance sheet , but must be disclosed in the notes .Common types of contingent liabilities include guarantees and the results of legal disputes. Guarantees can be given on behalf of an associate company , or as part of a larger business (banks often give guarantees of various sorts as part of their business).
When Is A Contingent Liability Recorded.
A contingent liability is a potential obligation that may arise in the future, depending on the occurrence or non-occurrence of a specific event.
According to Generally Accepted Accounting Principles (GAAP), a contingent liability should be recorded in a company’s financial statements if it meets both of the following criteria:
- The likelihood of the future event happening is probable, which means that it is more likely than not to occur.
- The amount of the liability can be reasonably estimated.
If both criteria are met, then the company should record the contingent liability in its financial statements, typically as a footnote or disclosure in the financial statements.
If the likelihood of the future event is only possible or remote, then the contingent liability is not recorded but disclosed in the notes to the financial statements.
It is important for companies to carefully evaluate their potential contingent liabilities and assess the likelihood of their occurrence, as failing to record or disclose a significant liability can lead to financial misstatements and legal or regulatory issues.
