Contingent liabilities means possible obligation arising from past events and may arises in future depending on occurrence and non-occurence of one or more uncertain future events.
In other words contingent liabilities are potential liabilities that may or may not occur depending on future events.
Further, contingent liabilities can be defined as
“a)*a possible obligation arising from past events and the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise;
b)# a present obligation that arises from past events but is not recognized because:
1) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
2) a reliable estimates of the amount of obligation cannot be made“.
*A contingent liabilities is a possible obligation arising from past events and may arises in future depending on occurrence or non-occurrence of one or more uncertain future events.(Part a) of definition).
Meaning :
An enterprise should not recognise the contingent liability in balance sheet . However it is required to be disclosed in notes to accounts. Unless possibility of outflow of resources embodying economic benefits is remote.
Generally the amount of contingent liabilities is estimated . The actual amount cannot be determined until the event that confirms the liability ocurres. Further, in many cases actual payee of the liability is unknown until the future event occur.
These liabilities are assessed regularly to determine whether an outflow of resources embodying economic benefits has become probable.
If it becomes probable that an outflow or future economic benefit will be required for an item previously dealt with as a contingent liability . A provision is recognised in financial statements of the period in which the change in probability occurs. Except in the extremely rare circumstances where no reliable estimate can be made.
#a contingent obligation may also be a present obligation that arises from the past events.(Part b) of definition) .
In simple words, it is a liability or potential loss that may occur in future depending on the outcome of an specific events. For instance product warranties, pending investigation, or potential lawsuit etc.
Example of Contingent Liabilities:
Suppose when lenskart sells eyeglasses and sunglasses it gives a purchaser 1 year warranty against defects .
Thus, an event sale of eyeglasses has taken place . However , the actual amount of the liability and the person to whom it will be paid are dependent on some future action. Namely customer will place order for approval of warranty for colour or any other defects. Eventually lenskart will either repair or exchange glasses.
