Question

Our contingent liabilities Recorded on a company’s books? Explain.

Answer 1

The question whether contingent liabilities are recorded on a company’s books can be discussed with respect to three possible scenarios.

1. When it is probable that a loss will occur due to the contingent liability and the amount of the loss can be reasonably estimated, the contingent liability is recorded on the books.

2. When the contingent liability is reasonably possible but not probable, or when the liability is probable but the amount cannot be estimated, the contingent liability is not recorded on the books but the existence of the contingent liability is disclosed in the notes accompanying the financial statements of the company.

3. When the probability of the occurrence of the contingent liability is remote, no treatment is necessary. Thus, the contingent liability is neither recorded in the books nor is it disclosed in the notes accompanying the financial statements.