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Under what circumstances is a future payment reported in the notes to the financial statements as...

Under what circumstances is a future payment reported in the notes to the financial statements as a contingent liability? Please explain.

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Answer #1

A contingent liability is a potential liability that may or may not occur, depending on the result of an uncertain future event.

Contingent Liabilities can be broken down into 3 main categories : (1) High Probability Contingent Liability (2) Medium Probability Contingent Liability and (3) Low Probability Contingent Liability.

The liabilities are categorised on 2 main parameters that are:

  • Probability of the liability arising is greater than 50%
  • Amount associated with the future payment can be estimated with a reasonable accuracy.

Any future payment which satisfies the 2 of the above mentioned conditions also known as Medium Probability Contingency must be disclosed under the notes to financial statements as contingent liability.

In case of any query/clarification please leave a comment below, if the answer was helpful please leave a thumbs up, Thanks!

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