Contingent Liability

Contingent Liability

See Also:
Current Liabilities
Balance Sheet
Accounting Principles
Accounting Concepts
Subsequent Events

Contingent Liability Definition

A contingent liability, defined is an obligation that a company might or might not have to recognize. This is because the event(s) are uncertain. It is also necessary for future events to occur to determine whether or not the obligation is true or not. Contingent liability exposure or the amount estimable may or may not be recognizable.

Contingent Liability Meaning

Furthermore, contingent liabilities can be anything ranging from litigation proceedings to accounts payable if a supplier did not provide a product or service to a company. Contingent liability recognition typically depends on two things, the likelihood of loss and the ability to estimate the loss. There are three descriptors to estimate the likelihood. These range from remote, to reasonably probable, to probable. Estimates are measured in two dimensions, which are reasonably estimable to not-reasonably estimable. Companies typically want to understand where they stand with a contingent liability, because the factors determine how a company should provide contingent liability disclosure in its financial statements.

Contingent Liability Example

For example, Blowout Preventer Inc. makes blowout preventers for drilling companies. Recently one of its products “malfunctioned” causing a massive explosion on a rig owned and operated by one of its primary customers Big Chief Inc. Big Chief has sued Blowout for the total sum of the rig as well as each worker’s salary. Big Chief has estimated this amount at an even $10 million dollars. Blowout Preventer’s lawyers have determined that it is probable that they will lose the case and have to pay the sum amount. Blowout Preventer must first accrue the $10 million on it’s books because the amount is reasonably estimable and also make a note on its financials. If the amount had not been reasonably estimable there would simply need to be a note in the financials discussing the case and probability that the company would need to pay some sort of monies.
contingent liability

ARTICLES YOU MIGHT LIKE

The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »

IN CRISIS? GET A STRATEGIC CFO! – CEO Blindspots Podcast

Friend of the firm, Birgit Kamps, recently had Strategic CFO President, Dan Corredor, as a guest on her podcast, CEO Blindspots. CEO BLINDSPOTS HOST: Birgit Kamps. She was speaking five languages by the age of 10, and lived in five countries with her Dutch parents prior to becoming an American citizen. Birgit’s professional experience includes starting

Read More »

SHRM calls ICHRA the 401K for Group Health Benefits

Fed-up with group health insurance? ICHRA is the new way to offer great health benefits and avoid ACA penalties, SHRM calls it the 401K for group health benefits.  In 2020 the Department of Labor, HHS and IRS changed the rules for employer health benefits. They changed the Affordable Care Act mandates and penalties for every

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ SERIES

Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®

Days
Hours
Min
Sec

September 12-15th 2022