For Contingent Liability:
When do you disclose it?
When do you record it?
When do you ignore it?
Solution
Contingent liabilites can be divided into three classifcations:
-Remote - There is a remote possibility that this will become a liability. A perfect example of this would be a frivolous lawsuit filed against your company with no sound legal reasoning. Those that are remote should be ignored.
-Possible - It is possible for this to become a liablity, but possibly not during this accounting cycle. Many companies list these possible liabilites in the footnotes of their year-end financial statements, but are not show on any of the actual statments as a liability. If it is possible, it should be disclosed.
-Probable - In this circumstance, the proposed liability is more than likely going to become a current or long-term liability. This may include an out-of court settlement where the company will be forced to pay a sum of money. Because it is probable, it should both be disclosed and recorded on the financial statements.
Hope this helps!
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For Contingent Liability- When do you disclose it- When do you record.docx
1. For Contingent Liability:
When do you disclose it?
When do you record it?
When do you ignore it?
Solution
Contingent liabilites can be divided into three classifcations:
-Remote - There is a remote possibility that this will become a liability. A perfect example of this
would be a frivolous lawsuit filed against your company with no sound legal reasoning. Those
that are remote should be ignored.
-Possible - It is possible for this to become a liablity, but possibly not during this accounting
cycle. Many companies list these possible liabilites in the footnotes of their year-end financial
statements, but are not show on any of the actual statments as a liability. If it is possible, it
should be disclosed.
-Probable - In this circumstance, the proposed liability is more than likely going to become a
current or long-term liability. This may include an out-of court settlement where the company
will be forced to pay a sum of money. Because it is probable, it should both be disclosed and
recorded on the financial statements.
Hope this helps!
