Contingent Liabilities

An unresolved event that may result in a cost or a loss describes a contingent liability. This describes how contingent liabilities are reported.

Examples of Contingent Liabilities

"Subject to chance".

Any potential cost or loss will be seen by auditors as a candidate for a contingent liability. The most frequent examples are:

1). Pending litigation
2). Special tax assessments or notice of penalties
3). Warranties or guarantees
4). Exposure to foreign exchange losses
5). Potential bad debts

Contingency is only ever recorded for liabilities. Contingent gains, for example anticipating the value of an as yet unconfirmed bonus discount for having reached a target of purchases from a supplier are disregarded.

Auditing Contingent Liabilities

Some potential liabilities are more contingent than others, which is why your auditors have a duty to assess them.

They will classify them as being probable, reasonably possible or remote. Where the outcome is perceived to be probable and its value can be reliably calculated, the auditors may take the view that the contingent liability should be included in the financial statements. This is highly likely if the potential cost is also seen as significant.

Reporting Contingent Liabilities

A common example of a probable contingent liability is pending litigation.

For example if an ex-employee has taken a complaint against your business to an industrial tribunal or a court and it is clear that their claim is likely to be recognised, the potential cost of that will represent a probable contingent liability.

Provided that the costs can then be reliably estimated they will be charged to the profit and loss account as a specific provision and shown in the balance sheet details as a liability. The balance sheet will include the contingent liability in current liabilities if it is likely to be payable within twelve months or in long term liabilities if it is to be payable beyond that.

Brief details of the liability will also need to be disclosed in the footnotes below the balance sheet.

Footnoting Contingent Liabilities

If the outcome of a contingent liability is regarded as being probable but without reliable evidence to support a value for its potential liability or if it is regarded as being reasonably possible, it will not be included in the balance sheet. Details and values will instead be displayed below the balance sheet as a footnote.

Where the possibility of a contingent liability is seen as remote, it is not required to be recorded as a footnote.

FAQs
Corporation Tax and Marginal Relief From 2023 Deferred Income Explained What is a Monthly Cash Flow Forecast What is Pretax Profit How does a balance sheet balance? Lockdown Recovery: Forecasting Profits, Cash and Finance. How to Apply for Business Interruption Scheme with Figurewizard How to calculate liquidity and short-term liquidity How to calculate markup and margin The Truth about Monarch Airlines Labour's Spending over 10 years from 2000 How to make profits and not run out of cash Credit Checking - How to Read Micro or Short Form Accounts Amortisation of Arrangement Fees for Long Term Loans BHS Profits Performance 2010 - 2014 BHS profits, liquidity and cash flows 2009 - 2014 How to Calculate a Free Cash Flow Forecast Campari: How to apply for a bank business loan What are Current Liabilities What are Current Assets Late Payers and Cash Flow What is Operating Cash Flow? What is Working Capital How to Read a Balance Sheet Business Planning Cash Flow Calculator Short Term Liquidity Business Liquidity Corporation Tax is not Calculated on Net Profit Small Business Corporation Tax Cash Flow Calculator Using Figurewizard - VAT Using Figurewizard - Sales by Month Using Figurewizard - HP or Instalment Plan Budgets Using Figurewizard - How the budgeted cash flow forecast is calculated Using Figurewizard - Fixed Asset Budgets Using Figurewizard - Calculate Purchase of Goods Using Figurewizard - Forecasting Payments to Suppliers Using Figurewizard - How to Forecast Cash Collection Solvency and the Balance Sheet Property in the Balance Sheet Why Equity is a Liability Asset Management and Liquidity Selling Fixed Assets Contracts: Invitation to Treat What is Deferred Income Loss on the Sale of Fixed Assets Calculating Gross Profit Margin Profit and Loss Statement What is Operating Profit What is Net Operating Revenue What is Equity Profit on the Sale of Fixed Assets How Taxable Profit is Calculated What are Operating Overheads Overheads - Provisions How Depreciation is Calculated What is Business Operating Activity What are Fixed Assets Liquidity and Cash Flow Balance Sheet Liabilities and Leases Stock or Inventory Control What is Distressed Stock or Inventory What is Interest Suspense Account Product Safety Laws What is a Bill of Exchange What is Payment at Sight What is a Pro Forma Invoice What is a Bill of Lading What is a packing note What is Demurrage Cash Flow Forecasts and Planning Factoring: Invoice Discounting and Cash Flow How Does VAT Work Figurewizard as a Sales Aid for Factoring and Invoice Discounting