Question

2- What is the difference between a contingent liability and a commitment?

( Accounting Auditing)

Answer 1

The first difference is that contingent liability is a possible obligation that arises out of past events but the future economic outflow cannot be measured with a reliable estimate whereas a commitment is a liability that will arise when the other party executes the contract.

In a contingent liability the outflow of economic benefits cannot be measured with reliable estimates (for instance a lawsuit pending against the company) while in a commitment the purchase consideration is agreed by the parties to the contract [ for instance a car lease or office lease]

The disclosure of a contingent liability is done by way of a note below the balance sheet whereas a commitment is shown as a note but the details of the contract such as the parties to the contract and the monetary consideration. Disclosure of a commitment is in a way more detailed than a contingent liability.