Contingent Liabilities

Topics: Balance sheet, Debt, Insurance Pages: 2 (534 words) Published: December 30, 2012
Contingent liabilities are possible future liabilities that will only become certain on the occurrence of some future events. A contingent liability is less certain than a provision, the latter is expected to recognize; however, a contingent liability might occur. An entity shall not recognize a contingent liability; nevertheless, the company should disclose it, as required by paragraph 86, unless the possibility of an outflow of resources embodying economic benefits is remote. Where an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability. Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognized in the financial statements of the period in which the change in probability occurs unless there is in the very rare circumstances where no reliable estimate can be made. The distinction between a real liability and a contingent liability depends on the certainty of the payment to be made. A real liability exists when it is certain that the payment will be made. A contingent liability exists when it is only possible that the payment will be made. Common types of contingent liabilities include guarantees and the results of legal disputes. Guarantees may be given on behalf of an associate company, or as part of a larger deal (banks frequently give guarantees of various sorts as part of their business).

Example 1: A company was sued by a former employee for RM 500,000 for age discrimination; the company has a contingent liability. If the company was found guilty, it would have a liability. However, if the company was not found guilty, the company...
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