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.

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