Definition
Contingent Liability
A contingent liability is a possible obligation that may arise depending on a future event, disclosed in the notes rather than recognised on the balance sheet.
Examples include disputed tax demands, pending litigation, guarantees given and claims not acknowledged as debts. Under Ind AS 37, these are not recorded as liabilities unless an outflow becomes probable and can be reliably estimated; otherwise they are merely disclosed in the notes to accounts.
Contingent liabilities can be large for Indian companies, especially disputed indirect-tax and income-tax demands. Analysts scrutinise them because a contingency that crystallises, such as an adverse court ruling, can suddenly convert into a real liability that hits the balance sheet and profit.
Related terms
- Contingent AssetA contingent asset is a possible asset arising from past events whose existence depends on an uncertain future event, disclosed but not recognised until virtually certain.
- Provisions (Accounting)A provision is a liability of uncertain timing or amount that a company recognises when it has a present obligation likely to require an outflow of resources.
- Off-Balance-Sheet ItemsOff-balance-sheet items are obligations or exposures not recorded as assets or liabilities on the balance sheet but disclosed in the notes.
- Notes to AccountsNotes to accounts are the detailed disclosures accompanying financial statements that explain accounting policies, breakdowns and items not visible on the face of the statements.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.