Contingent IV. liabilities
A. Contingent liability: a potential obligation for which payment depends on whether an
uncertain future occurs
B. Accounting for contingent liabilities
1. Depends of the likelihood that a future event will occur and the ability to estimate the
future amount owed if the event occurs
2. Probable event + reasonable estimated amount owed
a) Examples: warranties, vacation pay, income taxes
b) Recorded as liabilities
3. Reasonably probable event is explained in notes on the financial statements
4. Remotely probable event is not recorded
C. Reasonable possible contingent Must liabilities
1. adhere to the full disclosure principle which required information relevant to
decision making be reported and not ignored
2. Potential legal claims
a) Recorded in the accounts only if payment for damages is probable and amount
of payments can be reasonably estimated
3. Debt guarantees
a) Guarantees the payment of a debt owed
b) Guarantor discloses the guarantee in financial statements as a contingent
liability
4. Uncertainties
a) Example: natural disasters
b) Not contingent liabilities because they not future events that do not arise from
past transactions