Contingent Liability

Topics: Generally Accepted Accounting Principles, Balance sheet, Gaap Pages: 4 (1244 words) Published: November 1, 2011
Contingent Liability

1. Analyze why a company would prefer not to disclose its contingent liabilities. In order to understand why a company would or would not disclose his contingent liabilities it is important to know exactly what a contingent liability is. As I have learned throughout all of my accounting studies a liability is simply an obligation or debt that a business owes to an individual or an organization. Now there are many liabilities that include services, payroll, notes, and accounts payable. When one of these liabilities becomes a contingent liability it means that it is something that is a potential situation at the time. Contingent liabilities depend on a future event. What this means is the company may or may not have to pay this liability to let something happen resulting for a loss.

There are three types of contingent liabilities and each has its own rules on when and how to report its loss or potential loss on financial statements. The first type of contingent liability is called remote. A remote contingent liability would be something that is more than likely not going to happen or occur. In a situation like this a disclosure is not required nor a journal entry into the financial statements. An example of a remote contingent liability would be a frivolous law lawsuit. A frivolous lawsuit would be ignored in this situation.

The second type of contingent liability would be reasonably possible. When a contingent liability is reasonably possible it means that there is a reasonable possibility that a loss can occur. A significant lawsuit where the results are not known yet is a good example of a reasonable possible contingent liability. In this situation although the amount cannot be estimated, both the contingent liability and the contingent loss would be disclosed in all financial statements.

The third type of contingent liability would be probable. Probable contingent liability would occur when it's almost certain...
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