A contingent liability is:
- A possible obligation that arises from past events, and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the reporting entity’s control; or,
- A present obligation that arises from past events in circumstances where it is not probable that a transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot be measured reliably.
The generally accepted accounting treatment for contingent liabilities is to disclose them in the notes to the financial statements, but not to record them within the balance sheet.
Relevant accounting standards include Section 21 of FRS 102 and IAS 37.
Examples of contingent liabilities include guarantees and standby letters of credit.