Question

Contingencies that are reasonably possible are not described in the notes to the financial statements.

A. True

B. False

Answer 1

Correct Answer B: False

Reason: Contingencies or we may call contingent liability that are reasonably possible should be described in the notes to financial statement. It is because that user of financial statements must know those facts about any company or organisation which may affect company financial position in a near future.

Example of contingent liability is law suit.

What is the meaning of term "Reasonably Possible"?. It means that there must be sufficient cause to believe that there is a higher chance to happen some thing which may cause financial statements of the company. Example: Expert legal advise to loose a law suit in near future resulting in payment of dues.

Tutorial Note: Students often gets stuck and thinks why we do not create provision for such liability instead of describing in notes? So main difference between liability and contingent liability is that we are not fully assure that we will need to pay in future in case of contingent liability. Due to this only we use word contingent here.

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