How to Write Down a Contingent Liability
Company balance sheets contain intricate details about the business' finances. The balance sheets provide a look at the company's financial situation, which is often relevant for the success of the business as a whole and is also critical for shareholders and other interested parties. Contingent liabilities are potential obligations -- the company may not have to pay out, depending on the circumstances. In some cases, accounts need to disclose contingent liabilities on the balance sheet.
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Instructions
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Analyze the nature of the contingent liability. Determine if the liability is very probably, reasonably likely or very remote. You may need to seek advice to help you make the determination. For example, one of the most common forms of contingent liability is a lawsuit. A lawyer can help you determine the probability of losing a lawsuit and having to pay the plaintiff after analyzing the individual facts and circumstances.
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Include the contingent liability on the actual balance sheet and on the income statement as a loss if the liability is both likely and if the amount of the liability is known or can be estimated.
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Describe the contingent liability in the footnotes in the financial statement if it is reasonably likely but the amount cannot be determined. The Financial Accounting Standards Board does not require a company to disclose remote contingent liabilities.
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