Contingency usually refers to a fact that is likely to occur, but that does not have absolute certainty and a contingent liability is in accounting, an uncertain future obligation arising from a past event.
Recording these facts in the accounting books
Being uncertain and not quantifiable many of these contingencies, they cannot be recorded in the books at the moment when the past event that will generate the obligation occurs.
On some occasions, these obligations do have to be recorded in the company’s accounting. We are talking about provisions.
| Analysis of available evidence | Provision | Contingent liability |
|---|---|---|
| Probability of existence of current obligation > 50% | If the estimate is reliable, provision will be allocated | If the estimate is not reliable, it will be reported in the notes |
| Probability of existence of current obligation < 50% | No provision will be allocated | It will be reported in the notes |
| Remote probability of existence of current obligation | No provision will be allocated | It will not be reported in the notes |
Characteristics
There are mainly two:
- It generates an obligation, hence it is configured as a liability.
- It is foreseeable but uncertain, therefore it is a contingency.
Examples
To understand this concept well, I think it is necessary to cite a couple of examples:
A contingent liability would occur in case our company was sued and we find ourselves litigating with third parties. A past event can entail a future obligation, in this case it could be a pecuniary sanction, compensation…
Fines and sanctions from public bodies to the company as a consequence for example of delays in tax filing, payments to Social Security…
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