The ♊Reporting Requirements of Coജntingent Liabilities

Contingent liabilities are those that depend on t🎀he outcome of an uncertain event. These obligations are likely to become 🎉liabilities in the future.

Contingent liabilities must pass two thresholds before they can be reported in 澳洲幸运5官方开奖结果体彩网:financial statements. First, it must be possible to estimate the value of the contingent liability. The liability must have more than a 50% chance of being realized if the value can be estimated. Qualifying contingent liabilities are recorded as an expense on the 澳洲幸运5官方开奖结果体彩网:income statement and as a liability on the balance sheet.

The liability should not be reflected on the balance sheet if the🔯 contingent loss is remote and has less than a 50% chance of occurring. Any contingent liabilities that are questionable before their value can be determined should be disclosed in the footnotes to the financial statements.

Contingent Liabilities

Two classic examples of contingent liabilities include a company warranty and a𓄧 lawsuit against the company. Both represent possible losses and both depend on some uncertain future event.

Suppose a lawsuit is filed against a company and the plaintiff claims damages up to $250,000. It's impossible to know whether the company should report a contingent liability of $250,000 based solely on this information. The company should rely on precedent and legal counsel to ascertain the likelihood of damages.

The company should report a contingent liability equal to probable damages if a court is likely to rule in favor of the plaintiff either because there's strong evidence of wrongdoing or some other contributing factor. This is the case even if the company has liability insurance.

There may be no need for disclosure if the lawsuit is frivolous. Any case with an ambiguous chance of success should be noted in the financial statements but doesn't have to be listed on the balance sheet as a liability.

Journal Entries

A business accounting journal is used to record all business transactions. Each business transaction is recorded using the 澳洲幸运5官方开奖结果体彩网:double-entry accounting method with a credit entry to one account and a debit entry to anoth☂er. Contingen𝄹t liabilities are recorded as journal entries even though they're not yet realized.

Contingent liabilities require a credit to the accrued liability account and a debit to an expense account. The balance sheet's liability account is debited and the cash account is credited when the obligation is realized. An entry is also made in the associated expense of the income statement.

GAAP Compliance

Companies operating in the United States rely on the guidelines established in the 𝓡澳洲幸运5官方开奖结果体🧔彩网:generally accepted accounting principles (GAAP). A contingent liability is defined under GAAP as any potential future loss that depends on a "triggering event" to become an actual expense.

澳洲幸运5官方开奖结果体彩网:Shareholders and lenders should be warned about possible lo🔯sses. An otherwise sound investment might look foolish after an undisclosed contingent liability is realized.

GAAP specifies three categories of contingent liabilities: probable, possible, and remote. Probable contingencies are likely to occur and can be reasonably estimated. Possible contingencies don't have a more-likely-than-not chance of being realized but they're not necessarily considered unlikely, either. Remote contingencies aren't likely to occur and aren't reasonably possible.

Working through the vagaries of contingent accounting is sometimes challenging and inexact. Company management should consult experts or research prior accounting cases before making determinations. The company must be able to explain and defend its contingent accounting decisions in the event of an audit.

Any probable 澳洲幸运5官方开奖结果体彩网:contingency must be reflected in the financial statements. Remote contingencies should never be included. Possible contingencies that are neither probable nor remote should be disclosed in the fಞootnotes of the financial statements.

The Bottom Line

Contingent liabilities are those that are likely to be realized if specific events occur. These liabilities are categorized as being likely to occur and estimable, likely to occur but not estimable, or not likely to occur. Generally accepted accounting principles (GAAP) require contingent liabilities that can be estimated and are more likely to occur to be recorded in a company's financial statements.