What is a contingent liability?

A contingent liability may be defined as a possible obligation that arises from past events and depends on the outcome of an uncertain future event.

CONTINGENT LIABILITIES are those liabilities which may arise when certain claims are settled in the near future. So anything that is under litigation or liability is not ascertained as to pay or not to pay would fall under the classification of contingent liability.

 So for a banking scenario, normally a contingent liability could be bills receivable or bills for collection. The contingent liabilities in bank records include future contracts, Acceptance, endorsement, and guarantee on behalf of the customer, Liability for bill rediscounted, disputed liabilities, Income tax under appeal, Income tax deposits, and Claims not acknowledged as debt. Pending lawsuits, product warranties, guarantees on debts, potential fines or penalties, government probes, etc. also recorded as contingent liabilities.

 A bank has to disclose all its acceptances, endorsements, and other obligations under the head Contingent Liability on the face of the balance sheet to provide an accurate picture of its financial position.

Schedule 12 in the balance sheet -CONTINGENT LIABILITIES will not be added to the total of the assets and liability but will be reflected as a note and it will be for contingent liabilities. So these are the contingent liabilities which need to be shown in the form of foot note or notes to accounts under schedule 12.

Related Post: