Contingent Liability

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DEFINITION of 'Contingent Liability'

A potential obligation that may be incurred depending on the outcome of a future event. A contingent liability is one where the outcome of an existing situation is uncertain, and this uncertainty will be resolved by a future event. A contingent liability is recorded in the books of accounts only if the contingency is probable and the amount of the liability can be estimated.

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BREAKING DOWN 'Contingent Liability'

Outstanding lawsuits and product warranties are common examples of contingent liabilities.

For example, a company may be facing a lawsuit from a rival firm for patent infringement. If the company's legal department thinks that the rival firm has a strong case, and the company estimates that the damages payable if the rival firm wins the case are $2 million, it would book a contingent liability of this amount on its balance sheet. If, on the other hand, the company's legal department is of the opinion that the lawsuit is frivolous and very unlikely to be won by the rival company, no contingent liability would be necessary.

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RELATED FAQS
  1. How might a company's contingent liabilities affect its share price?

    Contingent liabilities are likely to have a negative impact on a company's stock share price because they threaten to reduce ... Read Full Answer >>
  2. What types of future events are taking into account for contingent liability?

    Contingent liabilities are potential liabilities that a company may incur that are dependent on the outcome of future events ... Read Full Answer >>
  3. How are contingent liabilities reflected on a balance sheet

    Contingent liabilities need to pass two thresholds before they can be reported in the financial statements. First, it must ... Read Full Answer >>
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