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May 23, 2007

What is a contingent liability?

A contingent liability is a potential liability…it depends on a future event occurring or not occurring. For example, if a parent guarantees a daughter’s first car loan, the parent has a contingent liability. If the daughter makes her car payments and pays off the loan, the parent will have no liability. If the daughter fails to make the payments, the parent will have a liability.

If a company is sued by a former employee for $500,000 for age discrimination, the company has a contingent liability. If the company is found guilty, it will have a liability. However, if the company is not found guilty, the company will not have an actual liability.

In accounting, a contingent liability and the related contingent loss are recorded with a journal entry only if the contingency is both probable and the amount can be estimated.

If a contingent liability is only possible (not probable), or if the amount cannot be estimated, a journal entry is not required. However, a disclosure is required.

When a contingent liability is remote (such as a nuisance suit), then neither a journal nor a disclosure is required.

A product warranty is often cited as a contingent liability that is both probable and can be estimated. Additional examples and a further explanation are presented in FASB’s Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. This accounting pronouncement is available at www.FASB.org/st.

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Comments

16 Responses to “What is a contingent liability?”

  1. Amit Sengar on February 7th, 2008 7:23 am

    very fine

  2. danz on June 20th, 2008 10:56 am

    what is the difference between probable &possible?

  3. Rahul on August 24th, 2008 4:48 am

    Göod

    thanx

  4. Mildon on October 4th, 2008 5:12 pm

    why do company lawyers tend to fight to NOT have estimated or contingent liabilities recorded?

  5. ABEL on October 11th, 2008 8:05 am

    what are the advantages and disadvantages extracting trial balance

  6. niall on October 31st, 2008 4:45 pm

    Companies do not want to record contingent liabilities because it reduces their profit. When recording a contingent liability you must also record the loss in an allowance account.

  7. michal on December 25th, 2008 4:35 am

    Excellent

  8. pb on January 13th, 2009 8:25 pm

    In calculation of book value is it necessary to include company’s contingent liability arising from a future law suit outcome?

  9. GOUTAM on February 24th, 2009 11:07 pm

    Is suit filed debtors are contingent liabilities

  10. tom on March 9th, 2009 10:54 am

    What interest rate do you use to calculate the contingent liability?

  11. hussien on March 16th, 2009 2:23 am

    send me the balavce sheet statement

  12. Adeniran Kehinde on March 25th, 2009 2:48 am

    In calculation of book value is it necessary to include company’s contingent liability arising from a future law suit outcome?
    send me the balavce sheet statement
    What interest rate do you use to calculate the contingent liability?
    Is suit filed debtors are contingent liabilities
    Companies do not want to record contingent liabilities because it reduces their profit. When recording a contingent liability you must also record the loss in an allowance accountwhat is the difference between probable &possible?

  13. jay on April 1st, 2009 1:37 am

    For banks, there are some trade finance products that are contingent liabilties like Documentary Collection and Foreign Checks. But if there is a credit event, it is not the problem of the bank because they are just acting as intermediaries between exporter and importer. So why are these classified as contingent liabilites?

  14. DW on July 15th, 2009 3:28 pm

    Can you include the legal fees expected to result from this contingent liability in your estimate to book?

  15. Obasi on July 24th, 2009 10:45 am

    How is contingent liabilities treated and also example of contingent liabilities

  16. shalini on September 8th, 2009 11:06 am

    explain with example why there is a need for an accounting standard in provision, contingent liabilities, and contingent assets.

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