Contingent Liabilities

Lesson Exercise Solution

Sometimes things happen during the year that might result in a future liability or gain.

How do we figure out how to record them?

There are three possibilities for liabilities:

Probable AND Reasonably Estimable - Recognize the liability on the balance sheet.
Probable OR Reasonably Estimable - Record the liability on the notes to the financial statement.
Not Probable and Not Reasonably Estimable - Don't recognize or record it.

Fortunately, figuring out what to do with potential future gains is much easier.

Future Gains can not be recognized on the balance sheet, but they can be put into the notes of the financial statements.

When it comes to figuring out which dollar amounts to use, there are a few rules:

If the estimate consists of one number, use that figure.
If there's a range of estimates, but one number is most likely, use that number.
Otherwise, if there's a range of values, and no number is more likely than any other, use the lowest value.

You're the CFO for Igloos Unlimited and need to decide on how to record a potential issue.

This is what you've been told:

Due to an issue with a warranty policy, the firm is expecting a fairly unlikely loss next year, estimated between $189 and $471, with the $339 figure more than any other.

How should this be recognized or recorded?

The loss should not be recognized on the balance sheet nor reported in the financial notes.

Unlikely contingent liabilities are always ignored.