Contingent liability
A contingent liability is a potential obligation arising from a past event whose outcome depends on a future uncertain event, such as a pending lawsuit; it is disclosed in notes unless an outflow is both probable and reliably measurable.
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Whether a potential obligation is booked as a liability turns on how confident the estimate is. A remote chance needs no disclosure at all. A possible outflow — such as a 30% chance of losing a €5 million lawsuit — is disclosed in the notes but not recognised. Once the outflow becomes probable and can be measured reliably, it stops being contingent and becomes a provision on the balance sheet.
Where it fits
SubjectFinancial AccountingAdvancedTopicThe Accounting Equation & Its ElementsAdvanced