Contingent Liabilities/Assets

reddwarf

I find this concept rather tricky so I wondered would someone be able to give me some examples?

Also of a contingent liability that wouldn't be recognised because:

a) it is not probable that an outflow of economic benefits will be required to settle the obligiation or
b) the obligation cannot be measured with sufficient reliablity.

thanks peeps,

DAVID LAWES

Contingent liabilities

reddwarf wrote: »

I find this concept rather tricky so I wondered would someone be able to give me some examples?

Also of a contingent liability that wouldn't be recognised because:

a) it is not probable that an outflow of economic benefits will be required to settle the obligiation or
b) the obligation cannot be measured with sufficient reliablity.

thanks peeps,

IAS37 (Provisions, contingent liabilities and contingent assets) identifies two types of contingent liability ; possible and remote. How you classify a particular contingent liability into one of these categories is largely a matter of judgement and depends on the circumstances of the case. In either case, the probability of the uncertain event on which the liability is contingent is less than 50%. If the probability of the event is 50% or above it would be an obligating event and you'd be into making a PROVISION, which is a different ballgame entirely.

Neither type of contingent liability is ever recognised in the financial statements, for basically one or both of the reasons that you state above. However (you probably knew there was a catch), you must document the existence of a POSSIBLE contingent liability in the financial statements in a note stating the nature, estimated timing and maximum estimated amount. You do not document the existence of a REMOTE contingent liability at all.

An example of a possible contingent liability would be if an employee of the comany has brought an unfair dismissal case and the company's lawyers have advised that it is possible that the employee's claim will succeed but the probability is assessed as no more than 40%. In an exam, I would see that as a trigger to treat it as a possible contingent liability and document it in a note (I assume that the paper would give details of the amounts and timing, etc). Conversely, if the exam said that the company's lawyers have advised that it is very unlikely that the employee's claim will succeed, I would see the words "very unlikely" as an indication of a remote contingent liability and not document it in a note to the accounts. In the real world, you'd have more information to work than you would in an exam, not that I recall this aspect being tested in recent DFS exams (does anyone else have a view on this?).

If you think it's complicated, you're not wrong. But I hope this simplfies matters to the extent possible. Anyone want to take issue with my explanation?

Gem7321

This is what I was taught

Very likely: Note and provision
Likely: Note
Very unlikely: No note

In AAT land they tend to use this language likely/unlikely and as DAVID LAWES has said this should be your trigger.

reddwarf

Excellent, thanks for the enlightenment!

Steve Collings

Hi,

David Lawes has provided a very good explanation of the concepts in FRS 12/ IAS 37. I have done an article on this very issue which should be uploaded on AccountancyStudents very soon (maybe tonight) and will also go on AccountingWEB next week. I'll provide a link to it when it has been published.

Kind regards

Steve

sdv

reddwarf wrote: »

Excellent, thanks for the enlightenment!

Agreed!
an excellent explanation and examples.

this will come very handy in future - must down load and save

thanks for that steve and gem7321