Contingent Liability

A contingent liability is a potential obligation that may or may not become a real obligation depending on the outcome of a future event. Contingent liabilities are not recorded on a company's balance sheet, but they are disclosed in the footnotes to the financial statements.

There are two types of contingent liabilities:

• Liabilities that are probable and can be reasonably estimated. These liabilities are recorded on the balance sheet as a liability.
• Liabilities that are possible but cannot be reasonably estimated. These liabilities are disclosed in the footnotes to the financial statements.

Some examples of contingent liabilities include:

• A lawsuit against a company that is not yet resolved.
• A warranty on a product that has not yet expired.
• A pending environmental cleanup that is not yet complete.

Contingent liabilities can have a significant impact on a company's financial statements. For example, if a company is sued and loses, the liability will be recorded on the balance sheet and will reduce the company's net income.

It is important for investors to be aware of contingent liabilities when evaluating a company. Contingent liabilities can represent a significant risk to a company's financial health.