Contingent Liability – meaning, definition, explanation, examples

A contingent liability is a possible obligation arising from past occasions and may arise in future depending on the incident or non-occurrence of several uncertain future events. A contingent liability may likewise be a present responsibility that emerges from previous occasions.

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E.g. if supplier of the organization files a legal suit, it will not be dealt with as a liability because no obligation is created instantly. Till that it is dealt with as a contingent liability. Please note that contingent liability is not taped in books of account, however divulged by method of a note to the financial statements.

The term ‘Contingent Liability’ can be defined as

( a) a possible commitment that occurs from previous events and the existence of which will be verified just by the incident or non-occurrence of several unpredictable future occasions not wholly within the control of the enterprise; or

( b) a present responsibility that emerges from previous occasions but is not acknowledged because:

( i) it is not likely that an outflow of resources embodying economic advantages will be required to settle the commitment; or

( ii) a trusted estimate of the quantity of the obligation can not be made.

An enterprise ought to not identify a contingent liability. These liabilities are evaluated constantly to identify whether an outflow of resources embodying economic advantages has actually ended up being likely. If it ends up being likely that an outflow or future financial benefits will be needed for an item previously dealt with as a contingent liability.

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