Learning OUTCOMES
Show FASB Statement No. 5 defines a contingency as “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.” There are three GAAP-specified categories of contingent liabilities: probable, possible, and remote.
The following two examples from annual reports are typical of the disclosures made in notes to the financial statements. Be aware that just because a suit is brought, the company being sued is not necessarily guilty. One company included the following note in its annual report to describe its contingent liability regarding various lawsuits against the company: Contingent Liabilities
Another company dismissed an employee and included the following note to disclose the contingent liability resulting from the ensuing litigation: Contingencies
You can view the transcript for “Accounting Tutorial Contingent Liabilities Training Lesson 4.7” here (opens in new window). PRACTICE QUESTIONWhich of the following scenarios contain a contingent liability?Pending lawsuits and product warranties are common contingent liability examples because their outcomes are uncertain.
What is a contingent liability quizlet?A contingent liability is a potential liability that may or may not become an actual liability depending on the outcome of future events.
Why is it important to disclose contingent liabilities?Disclosure of contingent liabilities — such as those associated with pending litigation or government investigations — is a gray area in financial reporting. It's important to keep investors and lenders informed of risks that may affect a company's future performance.
What are the three categories of contingent liabilities quizlet?What are the 3 classifications of contingent liabilities? probable, reasonably possible, or remote. What is a probable contingent liability? If the likelihood of a future obligation arising is "probable" (likely) and its amount can be reasonbly estimated, a liability is recognized in the financial statements.
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