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(90)-CONTINGENT LIABILITIES

Thursday, January 28, 2010

Contingent Liabilities

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

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