Question

Why are liabilities recognized even when they are uncertain?

Answer 1

The financial reporting follows one of the basic concept called prudence. As per this prudence concept, all the expected losses and expenses may be recorded and the expected gains and incomes may be ignored.

So, the liabilities represent future cash outflows. However, when these are uncertain, a provision may be created in order to be prudent and when such cash outflows occur in future there will not be any major impact in the financial statements.

Hence, the liabilities are recorded when they are uncertain. One such example of such estimated liabilities could be the estimated warranty obligations.