Financial reporting standards define contingent liabilities as:
- A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control; or
- A present obligation that arises from past events but is not recognized because, it is not probable that a transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot be measured with sufficient reliability.
As a rule of thumb, probable means more than 50% likely. If an obligation is probable it is not a contingent liability-instead, a provision is needed.
Treatment of contingent liabilities
Contingent liabilities should not be recognized in financial statements but they should be disclosed. The required disclosures are:
- A brief description of the nature of the contingent liability
- An estimate of its financial effect
- An indication of the uncertainties that exist
- The possibility of any reimbursement