Contingent liability
Also called: contingent liabilities
A possible obligation, such as a lawsuit or disputed tax demand, that is not probable or cannot be measured. It is described in the notes, not recorded.
Contingent liabilities do not appear in the balance sheet, but they must be disclosed in the notes unless the chance of payment is remote. They include legal claims, disputed taxes and guarantees given for other companies' loans.
If a payment becomes probable and can be estimated, the item becomes a provision and reduces profit.
Example
A claim of ₹80 crore that the company's lawyers think it will probably win is disclosed as a contingent liability.
Learn more in these lessons
- Provisions, contingent liabilities and impairmentsWhat are provisions, contingent liabilities and impairments?
- Notes to the financial statementsWhat do the notes to the accounts tell you?
- Financial red flagsWhat warning signs in a company's accounts should make you look harder?
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