Contingent Liability
A potential obligation dependent on uncertain future events, such as lawsuits or warranty claims, requiring disclosure or accrual based on outcome probability.
Contingent Liability
A potential obligation that may or may not become an actual liability, depending on the outcome of a future event, such as a pending lawsuit, government investigation, or product warranty.
For instance, if a company faces a $2 million lawsuit with a 60% probability of losing, it would record a contingent liability and corresponding expense for the estimated potential loss, disclosing the nature of the contingency in the financial statement notes.
Accounting standards require contingent liabilities to be recorded if the obligation is probable and the amount can be reasonably estimated. If reasonably possible but not probable, disclosure is required without recognition. Remote contingencies generally require neither recognition nor disclosure, though material remote contingencies may warrant disclosure.