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 a consultant with expertise in financial statements. One of your clients needs your help to determine if and how something should be recorded.

Here are the relevant facts:

Due to an issue with a lawsuit, the firm is expecting a fairly unlikely loss next year, estimated at $6,131.

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.