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Facing Potential Liability

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Facing Potential Liability

Contingent liabilities are situations where companies may face potential liabilities but are

uncertain of the details connected to them (Tarigan et al.,2022). Contingent liability could arise

due to a legal issue, and it is uncertain whether the company could be declared guilty of the

misdoing leading to a settlement or not probable of misdoing.

Contingent liability includes business or responsibilities that could arise due to past

events for a company(Tarigan et al.,2022). The company is not in a position to estimate the funds

required for the liability. Also, the estimation regarding legal obligations

needs to be determined, and Contingent liability is never recorded in the company's

financial statements. Hence, contingent liabilities have no accounting treatment but are recorded

in the notes to the financial statements of companies(Tarigan et al.,2022). The recording of the

contingent liability to the notes of the financial statements happens when the obligation is

measurable and there is a possible present event from a past occurrence.

IAS 37 states that contingent liability has to be constantly reviewed from the notes to the

financial statement on a yearly basis to determine if they have been converted to a provision or

liability (Demina et al.,2020).An example is a situation where a company guarantees another to a

financial institution, and after 2 years, the other company becomes bankrupt .The company then

records the guarantee to the profit and loss account as provisions for bad debts with an

estimation.In situations where estimations are not possible, the liability is not recorded.

The treatment of contingent liability by accounting standards is accurate since the

financial statements are not affected by events that are uncertain and without any exact

estimation.Also,there should be no changes to the accounting standards regarding reporting of

contingent liabilities.Potential gains and liability are to be treated differently since when they are
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the same; they will overstate or understate the financial statements making companies have the

wrong budgets.
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References

Tarigan, A., Ramadhani, I. F., & Muda, I. (2022). Principles and Assumptions in Financial

Reporting Based on IFRS. Journal of Positive School Psychology, 6(3), 2333-2342.

Demina, I., & Dombrovskaya, E. (2020). Generating risk-based financial reporting. In Digital

Science 2019 (pp. 387-399). Springer International Publishing.