What is a Contingent Liability?
Contingent liabilities are examples of financial obligations that a company is anticipated to pay, even though the level of probability may vary from anywhere from minimal to relative assurance that the obligation will be met. Calculating the exact rate of probability connected to any given contingent liability will take into consideration a number of factors, including events that are expected to take place in the near future. The classic example of a contingent liability is an outstanding lawsuit that has been properly filed against the corporation. Until the lawsuit is resolved, there is not a solid figure of liability that can be attached to the action. However, it is possible to project what the outcome of the lawsuit will be, and the amount of obligation the corporation will eventually be ordered to pay. From this perspective, it is possible to determine the contingent liability in the worst case scenario, and then use this figure to assess the ability of the company to honor the
When a person sells an asset they may accept a liability to make payments to the purchaser if certain events happen or if an asset is not as described in the contract. A common example is the warranties that are often found in share sale agreements. The vendors of the shares may agree to reimburse the purchaser if the company has undisclosed tax liabilities or the stock is over valued. The legal liability exists from the date of the agreement. But payment is contingent on the purchaser establishing the seller was in breach of the warranty or commitment.
A contingent liability is a potential liability. This means that the contingent liability might become an actual liability and a loss, or it might not. It depends on something in the future. If your parent guarantees your loan, your parent will have a contingent liability. Your parent will have an actual liability and a loss only if you do not make the payments on the loan. On the other hand, if you make the loan payments, your parent will not have a liability and loss. A $100,000 lawsuit filed against your company is a contingent liability (or loss contingency). Your company will have a liability and a loss only if your company is found guilty. If your company proves that it is not guilty, the contingent liability will not become an actual liability and loss. Another example of a contingent liability is a product warranty. If a company promised to replace a defective unit at no cost to the customer within one year of purchase, the company will have an actual liability only if units ar
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
