What are Contingent Liabilities?

Contingent Liabilities

Contingent liabilities are the debts or liabilities held by a company but whose value remains unknown. Because these values cannot be determined until a future event unfolds. An event that a company must be liable to may or may not arise in the future, so this liability is only a probability. If any contingency occurs in the future, then this is converted into a solid liability else it is not recorded in their financial statements.

What happens when a contingency arises?

When a contingency occurs it is recorded in the company’s financial statement. For example, a legal case may be filed against the company that may lead to potential losses. This lawsuit comes under a contingent liability and it should be recorded in the company’s financial statement. Also the liability can be classified based on their acuteness. Two records should be made for the probability of occurrence, namely:

• A reasonable estimate of the amount of loss that may incur to the company.
• The severity of the liability.

Unless the risk of loss is quiet high, these liabilities are not subjected to be recorded. When a liability is recorded it does not mean that funds must be provided to pay for it. It depends only on the impact it has caused and not on the cash flow.