Last reviewed: July 2026.
A contingent liability is a possible obligation, or a present obligation that is not recognised because an outflow is not probable or the amount cannot be measured reliably. IAS 37 generally requires note disclosure unless the possibility of an outflow is remote.
Contingent liabilities must be distinguished from recognised provisions and ordinary accruals.
Provision versus contingent liability
| Issue | Provision | Contingent liability |
|---|---|---|
| Obligation | Present legal or constructive obligation | Possible obligation, or present obligation failing recognition criteria |
| Outflow | Probable | Not probable, or existence remains uncertain |
| Measurement | Reliable estimate available | Reliable estimate may be unavailable |
| Accounting | Recognised as a liability and expense | Usually disclosed, not recognised |
Possible obligation
A possible obligation arises from past events but its existence will be confirmed only by uncertain future events not wholly within the entity's control.
Litigation where liability is genuinely uncertain is a common example.
Present obligation with non-probable outflow
An entity may have a present obligation, but if an outflow of resources is not probable, it does not recognise a provision under IAS 37. Disclosure is generally required unless the outflow possibility is remote.
Rare measurement exception
In extremely rare cases, a present obligation may exist but no reliable estimate can be made. The item is disclosed as a contingent liability rather than recognised.
Probable, possible and remote
- Probable outflow: recognise a provision when all criteria are met.
- Possible or not probable: disclose a contingent liability.
- Remote: generally no disclosure is required.
Probability assessment should use all available evidence and be updated each reporting date.
Worked litigation example
A customer claims 500,000 CU. Legal advisers conclude that losing is possible but not probable. The entity does not recognise a provision but discloses the nature, estimated financial effect and uncertainty unless disclosure is impracticable.
When the assessment changes
If later evidence makes an outflow probable and a reliable estimate is available, recognise a provision. The change is recorded in the period when the recognition criteria become satisfied.
See the IAS 37 provisions guide.
Joint and several obligations
Where an entity is jointly and severally liable, the portion expected to be met by other parties may be a contingent liability, while the expected entity-funded portion is recognised as a provision when criteria are met.
Guarantees
Financial guarantees may fall within IFRS 9 rather than IAS 37. Determine the applicable Standard before using the contingent-liability model.
Corporate and performance guarantees require analysis of contractual terms and scope.
Business combinations
IFRS 3 contains specific requirements for contingent liabilities assumed in a business combination. Acquisition-date accounting can differ from the ordinary IAS 37 recognition threshold.
Onerous contracts and restructuring
Onerous contracts can require recognised provisions. Future restructuring costs are recognised only when the entity has a qualifying constructive obligation.
Review the restructuring provisions guide.
Contingent assets are different
A contingent asset is a possible asset arising from past events. It is not recognised. Disclosure is made when an inflow is probable, and recognition occurs only when the inflow is virtually certain.
See the contingent assets guide.
Disclosure requirements
For each material class, disclose:
- the nature of the contingent liability;
- an estimate of its financial effect where practicable;
- uncertainties relating to amount or timing;
- the possibility of reimbursement;
- the fact that information is not practicable to provide, when applicable.
Seriously prejudicial information
In extremely rare cases, detailed disclosure could seriously prejudice the entity's position in a dispute. IAS 37 permits limited information, but the entity still discloses the general nature and reason for withholding detail.
Materiality and aggregation
Group contingent liabilities into classes with sufficiently similar nature. Do not aggregate dissimilar material risks in a way that obscures information.
Use the materiality judgement guide.
Events after the reporting period
A court decision or settlement after year end may provide evidence about conditions existing at the reporting date. Determine whether the event adjusts recognised amounts or requires non-adjusting disclosure.
Insurance recoveries
A possible insurance recovery does not eliminate the underlying obligation. Recognise a reimbursement separately only when the applicable recognition threshold is met and avoid netting disclosures that obscure the gross risk.
Multiple claims and portfolio assessment
For large populations of similar claims, probability can be assessed for the class as a whole. Individual large claims may require separate evaluation because their facts and materiality differ.
Current IASB work
The IASB is completing targeted improvements to IAS 37. Exposure-draft proposals and tentative decisions are not current requirements until final amendments are issued and become effective.
Evidence and governance
- obtain legal and technical assessments;
- maintain a register of claims and guarantees;
- update probability and amount estimates;
- review events after the reporting period;
- reconcile legal, insurance and accounting records;
- obtain governance approval for material disclosures.
Common mistakes
- recognising every lawsuit as a provision;
- using “possible” and “probable” interchangeably;
- failing to update assessments;
- omitting guarantees and joint obligations;
- confusing contingent liabilities with contingent assets;
- using boilerplate disclosures without financial effect or uncertainty;
- ignoring another Standard that applies first.
Key takeaway
Contingent liabilities are normally disclosed rather than recognised. The accounting depends on whether a present obligation exists, whether an outflow is probable and whether a reliable estimate can be made.
Official references: IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 37 supporting material.