Contingent Liabilities: Definition, Verification, and Mitigating Threats
Added on -2019-09-24
Contingent liabilities are potential risks associated with an organization's financial record that cannot be estimated beforehand and depend on past or future events. They are verified through conventional approaches and disclosed in documents. There are three categories of contingent liabilities: probable, possible, and remote. Mitigating threats associated with contingent liabilities involves identifying the nature of the threat and providing adequate guidelines for incorporating it into practice. The right time to take contingent liabilities is when there is a malfunction of the market, as per the government's opinion.
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Define Contingent Liabilities?The concept of contingent liability can be defined as the possibility of having certain oruncertain risks associated with the financial record of an organisation. In other words, itcannot be estimated from before and not in the hand of the businessmen. Rather, it isdepending on either past or future events. A. Contingent liabilities is a legal contract that takes place either based on the episode or non-occurrence of a probable prospect event. An organisation may not have any kind of controlmeasures prior to such events taking place in future.B. In fact, a contingent liability is a suitable concept that might be depending on the pastevent. In other words, not necessary that funds would always be ready to be released theliabilities at emergency situation. Or else, it might not also be possible that a suitable budget isplanned before for uncertain compulsions. Verification of Contingent LiabilitiesContingent liabilities have no scope of recording it into monetary report for an organisation.In other words, such type of compulsions can be taking place in the near or far in future thathas no probable options to think about. Based on such conditions, some of the majorsecretarial action has been initiated by providing some conventional approach. In this regard,some of the contingent benefits will be disclosed at the end of footnote written by anorganisation. Hence, it would look like as follows:-There should be some promising commitment at present from the past event.The seepage of cost-effective possessions needs to be settled for managing thecompulsions, which are probable. 1
In fact, the possibility of seepage of resources should not be remote in nature. There need to be reasonable amount of requirement that can be estimated well. Considering these above-mentioned approaches, the senior management team of the organisationshould be discussing and taking the decision that whether it can be contingent liability or even ifit is a liability in main concern. Taking an example, If a company gives a bank a guarantee period of three years of period, as subsidiary then for theperiod mentioned it is accepted as a contingent liability. However, in the present date, thecompany undergone financial disaster and there is no option left for the company to stay, ascontingent liability. In this case the company should be considering it as a provision and transferall the recorded details for recognition.Contingent Liability and ProvisionsProvision is a strategic responsibility that can be estimated with the help of reasonable amountof budget. It tries to depict that there will be a compulsion but no specific amount that can bedetermined. Therefore, such types of cases can be assumed as a provision for liability. On the other hand, provisions can be secured in a book which is later on deducted under theaccount of profit and loss. For example, provision for bad amount overdue or assessment is onesuch incident. Based on one particular scenario, provision cannot be secured in a book. If the liability is notable to be calculated under any reliable base then such liability needs to be recorded ascontingent liability. Therefore, we cannot verify such cases, as a book of accounts, which is very2
rare in case. Hence, it can be further seen below comparing the differences between provisionsand contingent liabilities:- Provisions:- Contingent Liability:- Provisions are existing and current presentcommitment with uncertain or liabilities butwith uncertain quantity. Here, the amount canbe precise with an extensive evaluation. Contingent liabilities are potential duty. Insuch case, it might take place at point of time.It will be based on the incidence or non-occurrence of definite occasions that cannotbe controlled by an organisation. Provisions have possible scope of mitigatingthe risks and meeting the identificationcriteria. It refers to the books that can beregarded under this book of accounts. Contingent liabilities, on the other hand, areonly disclosed in the documents, as they areunable to be net by the criterion. When the management is estimating theprobability of the liability which will help insettling the obligations then it will beresulting in the economic outflow resourcesand is considered as provision. If the management is thinking that there arepossible chances of economic outflow. Contingent liabilities are considered both to be explicit as well as implicit. Explicit contingentliabilities are considered as the obligations which are on the base of contracts, policycommitments as well as laws and regulations. The few expectations that the are being selectdeliberately by the government are as follows:Loan guarantee: State guaranteeing for repaying the borrowing the third party only ifthere is a defaultExport Guarantee: Guarantee provided against reneging the importer’s contract and theactions taken by the government which preclude the contract’s fulfilment as well assovereign defaultOther Financial guarantees: Guarantees provided against the rate of exchange,guaranteeing the minimum pension on the ground of schemes of private pension, profitas well as income. It also incorporates PPP arrangements as well as pension savingguarantees. 3
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