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Contingent liability

A contingent liability is a potential financial obligation that arises from a past event but depends on the occurrence or non-occurrence of one or more uncertain future events to confirm its existence.^[1]^[2] In accounting, it represents a loss contingency where the entity may incur a liability, such as in cases of pending litigation or product guarantees, but only if specific criteria related to probability and estimability are met for recognition or disclosure in financial statements.^[1]^[2] Under U.S. Generally Accepted Accounting Principles (GAAP), as outlined in ASC 450 (formerly SFAS No. 5), a contingent liability is accrued as a loss in the financial statements if it is probable that a liability has been incurred and the amount can be reasonably estimated based on available information prior to issuance.^[1] If the loss is reasonably possible but not probable, or if probable but not estimable, it must be disclosed in the notes to the financial statements, including the nature of the contingency and an estimate of possible loss or range of loss if practicable.^[1] Accrual is not permitted for remote contingencies, and general reserves for unspecified risks are prohibited to avoid overstating liabilities.^[1] In contrast, International Financial Reporting Standards (IFRS), governed by IAS 37, define a contingent liability more narrowly as either a possible obligation arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity's control, or a present obligation that is not recognized because it is not probable that an outflow of resources will be required or the amount cannot be measured reliably.^[2] Unlike provisions—which are recognized for present obligations that are probable and reliably estimable—contingent liabilities under IFRS are not recorded on the balance sheet but are disclosed in the financial statements unless the possibility of outflow is remote.^[2] Measurement, when disclosure requires estimation, uses the best estimate of the expenditure required to settle the obligation, often discounted to present value if the effect is material.^[2] Common examples of contingent liabilities include pending or threatened lawsuits, warranties on products or services, environmental remediation obligations, guarantees provided to third parties, and potential tax disputes.^[1]^[2] These items are critical for stakeholders as they can significantly impact a company's financial position and risk profile, influencing investor decisions and regulatory compliance.^[1] Proper accounting for contingent liabilities ensures transparency and adherence to conservative principles in financial reporting.^[2]

Overview

Definition

A contingent liability is defined as a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity, or a present obligation arising from past events that is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount cannot be measured with sufficient reliability.^[2] This definition, established in International Accounting Standard (IAS) 37, distinguishes contingent liabilities from actual liabilities by emphasizing their conditional nature, where the obligation remains potential until future events resolve the uncertainty.^[3] Unlike certain liabilities, which represent unconditional present obligations settled through definite outflows of resources, contingent liabilities hinge on external or unpredictable developments, such as the outcome of pending lawsuits or the claims arising under product warranties, without presupposing the likelihood of occurrence at the definitional stage.^[2] In essence, they capture situations where an entity has a historical exposure but lacks full control over the confirming events, thereby introducing inherent uncertainty into financial reporting.^[4] The concept of contingent liabilities originated in the mid-20th century as part of evolving accounting principles aimed at addressing uncertainty in financial statements, with foundational guidance provided in the United States through Accounting Research Bulletin No. 43 (1953) and later formalized in Statement of Financial Accounting Standards No. 5 (SFAS 5), issued by the Financial Accounting Standards Board in 1975, which set standards for recognizing and disclosing loss contingencies.^[1] Internationally, the framework was refined in IAS 37, issued by the International Accounting Standards Committee in 1998, building on earlier standards like IAS 10 (1978) to standardize treatment across jurisdictions.^[2] These developments reflected a broader push for transparent reporting of potential risks in an era of increasing corporate complexity.^[3]

Key Characteristics

Contingent liabilities are distinguished by their general non-recognition on the balance sheet, where they are instead disclosed in the footnotes to the financial statements unless an outflow of economic benefits is probable and the amount can be reliably estimated.^[2] Under International Financial Reporting Standards (IFRS), IAS 37 specifies that such liabilities are not recorded as provisions because they either represent possible obligations dependent on uncertain future events or present obligations that fail the recognition criteria of probability or reliable measurement.^[3] Similarly, under U.S. Generally Accepted Accounting Principles (GAAP), ASC 450 requires accrual of loss contingencies only if both probable and reasonably estimable, with non-accrued items disclosed if reasonably possible but not remote.^[1] This treatment ensures that financial statements reflect only confirmed obligations while alerting users to potential exposures. A core characteristic of contingent liabilities is their inherent uncertainty, stemming from dependence on external events not wholly within the entity's control, such as regulatory decisions or third-party actions, as well as challenges in internal estimation of potential loss amounts.^[2] IAS 37 paragraph 10 defines this uncertainty as arising from past events whose confirmation relies on future outcomes, emphasizing that the existence or extent of the obligation remains unresolved at the reporting date.^[3] In parallel, ASC 450 describes a contingency as an existing condition involving uncertainty as to possible gain or loss to be resolved by future events, requiring ongoing assessment of these factors at each reporting period.^[5] This dual reliance on unpredictable external developments and subjective estimates underscores their provisional nature compared to definite liabilities. Despite not being immediately recorded, contingent liabilities can profoundly impact financial statements by influencing assessments of liquidity and solvency, as they signal risks that could require significant resource outflows if realized.^[2] Disclosure requirements under IAS 37 (paragraphs 86–92) mandate detailed notes on the nature of the contingency, estimated financial effects, and associated uncertainties, thereby providing stakeholders with critical information without altering the balance sheet directly.^[3] ASC 450 similarly emphasizes disclosures for material contingencies to enable informed judgments on potential effects, noting that such information affects investor perceptions of overall financial stability.^[1] In risk assessment and management, contingent liabilities serve as an essential tool for enhancing transparency, allowing entities to communicate off-balance-sheet risks systematically and aiding users in evaluating the entity's exposure to uncertain future obligations.^[2] By requiring disclosure unless the likelihood of occurrence is remote, both IAS 37 and ASC 450 promote proactive risk communication, helping to mitigate information asymmetry between management and external parties.^[3]^[1] This role reinforces their function in broader financial reporting frameworks, where they bridge the gap between recognized liabilities and emerging threats.

Classification

By Likelihood and Estimability

Contingent liabilities are classified primarily by the likelihood of the uncertain event occurring and the estimability of any resulting financial outflow, providing a framework for assessing disclosure and recognition obligations under accounting standards. This classification helps entities determine appropriate treatment based on the degree of uncertainty involved. The likelihood assessment categorizes contingencies into three levels: probable, reasonably possible, and remote. Probable contingencies are those where the future event is likely to occur; under IFRS (IAS 37), this means more likely than not, while under U.S. GAAP (ASC 450) it generally implies a high likelihood.^[2]^[1] Reasonably possible contingencies fall between probable and remote, representing events with a more than remote but less than likely chance of occurring. Remote contingencies, conversely, involve slight chances of occurrence, where the risk is deemed insignificant for financial reporting purposes. These probability assessments, while qualitative in standards, guide preparers in evaluating the need for accrual or disclosure. For instance, under U.S. GAAP as outlined in ASC 450, probable events trigger further evaluation for recognition, while IAS 37 from the IASB similarly uses these terms to delineate reporting requirements.^[1]^[2] In parallel, estimability assesses whether the potential financial impact can be reasonably quantified. Contingencies with a known amount or one that can be reasonably estimated—using best available evidence such as historical data, expert opinions, or expected value calculations—allow for more precise accounting treatment. If estimation is not feasible, the contingency is described qualitatively, focusing on the nature of the uncertainty rather than numerical figures. This dual classification by likelihood and estimability determines the action: probable and estimable contingencies are accrued as liabilities; probable but not estimable, or reasonably possible ones, require disclosure in footnotes; remote contingencies are generally neither accrued nor disclosed unless material. This framework originated in the 1970s and 1980s through efforts by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to standardize the handling of uncertainties in financial statements. FASB's Statement of Financial Accounting Standards No. 5, issued in 1975, first formalized the probable, reasonably possible, and remote categories under U.S. GAAP, emphasizing consistency in loss contingency recognition. Similarly, the IASB's IAS 37, effective from 1999 but building on earlier international efforts in the 1980s, aligned global practices by integrating likelihood and estimability for provisions and contingencies. These developments addressed inconsistencies in pre-standard practices, where entities varied widely in disclosing potential obligations, thereby enhancing comparability and transparency in financial reporting.

Explicit vs. Implicit Contingencies

Contingent liabilities are categorized into explicit and implicit types based on their legal and contractual nature, particularly within government finance frameworks. Explicit contingencies refer to direct, contractual obligations that arise from formal agreements, such as loan guarantees or one-off financial assurances provided by governments to support specific transactions or entities.^[6] These are legally binding and triggered by discrete events, like a borrower's default, making them enforceable through contracts or statutes.^[7] In contrast, implicit contingencies encompass unwritten or assumed obligations that stem from public expectations, policy commitments, or moral imperatives, without a formal legal basis, such as potential future social security benefits or environmental cleanup liabilities.^[6] These rely on discretionary government action and are often harder to quantify due to their non-contractual origins.^[7] Within the explicit category, subtypes include one-off guarantees for isolated large-scale risks, standing guarantees that provide ongoing assurance for loans or debts, and other explicit claims like indemnities or legal obligations.^[6] The International Monetary Fund's Government Finance Statistics Manual 2014 (GFSM 2014) outlines these in its framework for recording contingent liabilities as memorandum items on the balance sheet, emphasizing their role in assessing fiscal exposure.^[6] Similarly, the IMF's External Debt Statistics: Guide for Compilers and Users details explicit contingencies as contractual arrangements, such as credit guarantees or contingent credit facilities, which create conditional payment obligations and are attributed to the guarantor only if activated.^[8] This structure highlights how explicit contingencies directly contribute to potential increases in public debt if realized. The key distinction in enforceability lies in their binding nature: explicit contingencies are legally enforceable, providing creditors with clear recourse and imposing measurable fiscal risks on governments, whereas implicit contingencies depend on policy decisions or moral commitments, lacking formal enforcement mechanisms.^[6] Both types pose significant fiscal risks, as noted in the IMF frameworks, by potentially straining government resources and affecting debt sustainability, though explicit ones are more readily identifiable and quantifiable for risk management purposes.^[7] This classification, independent of probability assessments, aids in comprehensive monitoring of government obligations beyond core balance sheets.^[6]

Accounting Treatment

Recognition and Measurement

Under US GAAP (ASC 450), a loss contingency is recognized in the financial statements as an accrued liability only when it is probable that a liability has been incurred and the amount can be reasonably estimated. Under IFRS (IAS 37), a present obligation is recognized as a provision if it is probable that an outflow of economic benefits will be required to settle the obligation and the amount can be reliably estimated; contingent liabilities are not recognized. These recognition thresholds ensure that only those contingencies likely to result in a loss are recorded on the balance sheet, distinguishing them from mere possibilities. Under IAS 37, "probable" is interpreted as more likely than not (greater than 50% likelihood), while ASC 450 interprets "probable" as likely to occur (typically 70-80% likelihood, though not strictly defined).^[2]^[9] If these criteria are not met, the item remains a contingent liability and is not accrued but may require disclosure.^[10] Once recognized, the liability is measured at the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. This estimate incorporates all available evidence, including risks and uncertainties, and is typically the most likely outcome adjusted for probability-weighted scenarios. For a single obligation, the most likely amount is used, potentially discounted to present value if the time value of money is material and the timing is reliably determinable; a pre-tax discount rate approximating the entity's borrowing cost is applied under IFRS, while US GAAP generally does not permit discounting except in limited cases. In cases involving a range of possible outcomes with no single best estimate, such as a settlement amount between $1 million and $3 million, the midpoint ($2 million) is used under IAS 37 when each point in the range is equally likely, whereas ASC 450 requires accruing the minimum ($1 million) while disclosing the range.^[2]^[9]^[11] The recognition process involves recording a journal entry to reflect the estimated loss: debit an appropriate expense or loss account (e.g., litigation expense) and credit a liability account (e.g., accrued contingent liability) for the measured amount. For example, if a lawsuit settlement is deemed probable at $500,000, the entry would be: Debit Loss on Litigation $500,000; Credit Accrued Liability $500,000. This accrual impacts both the income statement and balance sheet, recognizing the potential economic impact in the current period.^[12]^[13] Contingent liabilities are reassessed at each reporting date based on the latest available information, with adjustments made to the carrying amount if the probability, estimate, or circumstances change. Increases in the estimated outflow lead to additional expense recognition, while decreases result in a gain or income reversal, provided the original criteria for recognition still apply. This ongoing evaluation aligns with accrual accounting principles, ensuring the financial statements reflect the most current assessment of the obligation. As of 2025, the IASB is redeliberating proposed amendments to IAS 37 to clarify recognition and measurement of provisions, including which costs to include (e.g., own workforce vs. outsourcing); finalization is pending.^[14]^[2]^[15]

Disclosure Requirements

Contingent liabilities must be disclosed in the notes to the financial statements unless the possibility of any outflow of resources is remote, providing users with essential information about potential obligations that could impact the entity's financial position. For each class of contingent liability, the disclosure typically includes a brief description of the nature of the contingency, an estimate of its potential financial effect (or a range of possible outcomes where practicable), and details on the uncertainties related to the amount or timing of any outflow. If reimbursement is possible, the extent to which it is expected to offset the potential loss should also be indicated. When an estimate cannot be made, the entity must explicitly state that fact. Under IAS 37, these requirements apply at the end of the reporting period for any non-remote contingencies. Similarly, under US GAAP (ASC 450-20-50), disclosure is required for loss contingencies that are reasonably possible, including the nature of the contingency and an estimate of the possible loss or range, or a statement that no estimate can be made.^[3]^[9] Disclosures are required in annual financial reports and, if material, in interim statements, with updates provided for any significant changes in the status or estimate of the contingency after the reporting date but before the statements are issued. This ensures ongoing transparency as new information emerges. Materiality is assessed entity-specific, considering whether the omission or misstatement could influence users' economic decisions; a common quantitative benchmark is 5% of net income or total assets, though qualitative factors such as the nature of the risk also play a role.^[16]^[17] These reporting obligations are enforced through securities regulations to safeguard investors from misleading information about hidden risks. For instance, the U.S. Securities and Exchange Commission (SEC) mandates such disclosures under Regulation S-K (Item 103 for legal proceedings) and Item 303 for Management's Discussion and Analysis, emphasizing timely and complete reporting of material contingencies. Post-2014 regulatory updates, including the SEC's 2018 adoption of disclosure simplification amendments, have reinforced the need for enhanced transparency in contingent liability notes without altering core requirements, focusing instead on clarity and integration with GAAP.^[18]^[19]

Examples

Legal and Financial Contingencies

Legal contingent liabilities often arise from pending lawsuits, such as product liability claims where a company's products are alleged to have caused harm to consumers. For instance, pharmaceutical companies have faced multidistrict litigation over proton pump inhibitors like Nexium, with claims of kidney injuries leading to ongoing class actions in U.S. and Canadian courts.^[20] Regulatory fines represent another common legal contingency, particularly in industries subject to strict compliance, where violations of environmental or safety standards may result in penalties whose amounts depend on enforcement actions.^[3] Tax disputes also exemplify legal uncertainties, as companies contest assessments from tax authorities, with outcomes hinging on judicial interpretations and potential appeals.^[3] Financial contingent liabilities include obligations tied to product warranties, where manufacturers guarantee repairs or replacements for defective goods, but the extent of claims remains uncertain based on future customer experiences.^[21] Environmental remediation obligations arise from potential cleanup costs at contaminated sites, often linked to past industrial activities, with liabilities triggered by regulatory discoveries or legal mandates. Asset retirement commitments, such as decommissioning costs for facilities like nuclear plants or oil platforms, form another financial example, where the obligation materializes upon asset retirement but is subject to estimation uncertainties during ongoing operations.^[22] A hypothetical scenario illustrates these dynamics: a manufacturing firm faces a $10 million product liability lawsuit alleging defective components caused injuries, classified as probable under likelihood assessments but unestimable due to varying potential damages and defenses, resulting in footnote disclosure rather than balance sheet recognition.^[3] The resolution of such contingencies can significantly impact a company's financial position; an adverse lawsuit outcome may require recognizing a large expense, directly reducing reported earnings and potentially eroding investor confidence.^[23] For example, prolonged product liability litigation in the medical device sector has been associated with reduced new product introductions, indirectly affecting revenue streams and contributing to stock price volatility as markets react to settlement announcements or trial developments.^[24] These contingencies are particularly prevalent in manufacturing, where supply chain defects and warranty claims pose ongoing risks, and in pharmaceuticals, where litigation over drug side effects and regulatory compliance can involve substantial exposures.^[25] In both sectors, proactive risk management, including insurance and legal reserves, helps mitigate the potential for earnings surprises upon resolution.^[26]

Government and Implicit Examples

In public finance, governments frequently encounter contingent liabilities through sovereign debt guarantees, where a state pledges to cover debts of other entities if they default, thereby exposing national budgets to potential outflows. For instance, guarantees on loans to subnational governments or public corporations represent explicit contingent liabilities that can materialize during economic downturns, as highlighted in analyses of fiscal risks. Similarly, bailout commitments for state-owned enterprises (SOEs) constitute significant risks, often implicit in nature, where governments may intervene to prevent financial collapse, leading to recapitalization costs that average around 6% of GDP across historical realizations but can escalate to 40% in major cases. Disaster relief funds further exemplify government contingent liabilities, particularly for uninsured natural calamities, where federal or national coverage triggers ad hoc spending on recovery efforts, classified as nonfinancial contingent obligations.^[27]^[28]^[29]^[30]^[31] Implicit contingent liabilities in government contexts often arise from policy-driven expectations rather than formal contracts, such as unfunded pension obligations for public employees, which represent future benefits not backed by dedicated assets and are projected to burden budgets amid demographic shifts. These obligations, akin to implicit contingencies, are typically disclosed as memorandum items rather than balance sheet liabilities. Climate change-related fiscal risks provide another key example, including implicit commitments to fund flood defenses or adaptation measures, where rising sea levels and extreme weather events could impose unforeseen costs on public infrastructure and relief, exacerbating fiscal pressures in vulnerable regions like sub-Saharan Africa.^[28]^[32]^[33] The International Monetary Fund's Government Finance Statistics Manual 2014 illustrates implicit social security liabilities through the lens of aging populations, where net obligations for future benefits—such as old-age pensions and survivor support—must be estimated as the present value of projected payouts minus contributions, recorded as memorandum items to reflect long-term fiscal sustainability risks without altering core accounts. This approach underscores how demographic aging amplifies these liabilities, particularly in unfunded schemes, potentially straining government resources over decades.^[6] Post-2020 developments, notably during the COVID-19 pandemic, have intensified government contingent liabilities via extensive loan guarantee programs, with European Union countries issuing guarantees equivalent to up to 27.1% of GDP in Finland and 19.8% in Denmark by late 2020 to support businesses and financial institutions. These measures, often extended to central and local levels, highlight the rapid escalation of explicit guarantees in crises, contrasting with more opaque implicit risks.^[34]^[35] The fiscal implications of these contingent liabilities are profound, as their materialization can impose sudden strains on national budgets, diverting funds from essential services and contributing to debt accumulation, with historical data indicating average costs of 6% of GDP and potential spikes far higher in severe scenarios. Effective management requires integrating such risks into fiscal frameworks to mitigate budgetary volatility and ensure long-term stability.^[29]^[36]^[37]

Comparisons

With Provisions

Provisions in accounting are recognized liabilities arising from present obligations created by past events, where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and the amount can be reliably estimated.^[3] Unlike contingent liabilities, which depend on uncertain future events, provisions address commitments that are already in existence but involve uncertainty in timing or quantum.^[2] The primary distinction lies in recognition and presentation: provisions are accrued as liabilities on the balance sheet, reducing reported equity and reflecting the expected economic impact, whereas contingent liabilities are not recorded unless they satisfy the criteria for provisions, instead requiring disclosure in the notes if an outflow is possible but not probable.^[38] This separation ensures that only obligations with a sufficient level of certainty affect the financial position directly, while potential risks are transparently communicated without distorting current metrics.^[39] In certain scenarios, the boundary between the two blurs, as a contingent liability may evolve into a provision when new information increases the likelihood of an outflow beyond the applicable threshold, such as exceeding 50% probability under some accounting frameworks.^[40] For instance, an initial lawsuit disclosure as a contingent liability might shift to a provision if court developments make settlement more likely than not. This reclassification highlights the dynamic nature of assessments, requiring periodic reviews to align accounting treatment with emerging facts.^[2] Practically, entities apply a decision framework to differentiate: first, confirm a present obligation from a past event exists; second, assess if an outflow is probable; and third, determine if a reliable estimate is feasible. If all conditions are met, the item qualifies as a provision; otherwise, it remains a contingent liability subject to disclosure.^[38] This structured approach, often visualized as a decision tree, aids in consistent application and mitigates subjective judgments in financial reporting.^[39]

With Actual Liabilities

Actual liabilities represent fixed obligations arising from past events, where there is no uncertainty regarding their existence, and they are recognized directly on the balance sheet at their full estimated amount. These include straightforward commitments such as accounts payable for goods received or loans payable with specified repayment terms, which stem from enforceable contracts or transactions already completed. Unlike contingent liabilities, actual liabilities do not depend on the occurrence of future events for confirmation, ensuring their immediate inclusion in financial statements to reflect the entity's true economic position.^[3] The core distinction between actual liabilities and contingent liabilities lies in the level of certainty: actual liabilities are unconditionally owed and must be settled regardless of subsequent developments, whereas contingent liabilities hinge on uncertain future events and may never materialize into actual outflows. For instance, under International Financial Reporting Standards (IFRS), actual liabilities meet the criteria for recognition as present obligations with probable outflows and reliable measurement, leading to their accrual as soon as the obligation is established. In contrast, contingent liabilities, as defined in IAS 37, are either possible obligations or present ones that fail recognition thresholds due to improbability or unreliability, resulting in off-balance-sheet treatment unless they escalate. This differentiation ensures that financial statements prioritize verifiable commitments over speculative risks.^[2]^[3] On the balance sheet, actual liabilities immediately reduce shareholders' equity by increasing total liabilities, providing a clear view of resources committed for repayment, such as through accrued expenses or long-term debt. Contingent liabilities, however, are typically disclosed only in the notes to the financial statements if their occurrence is possible but not probable, avoiding distortion of the balance sheet until certainty is achieved. This approach aligns with U.S. Generally Accepted Accounting Principles (GAAP) under ASC 450, where actual liabilities are accrued upon confirmation of the obligation, while contingencies remain undisclosed or noted based on probability assessments. The immediate equity impact of actual liabilities underscores their role in assessing a company's liquidity and solvency without the conditional nature of contingents.^[1] (Note: ASC 450 is accessed via FASB's Codification, public summary at the linked FASB page) Actual liabilities occupy the low-risk end of the obligation spectrum, characterized by high certainty and minimal variability in outcome, in contrast to the high-risk, conditional nature of contingent liabilities that could evaporate or intensify based on external factors. This spectrum helps stakeholders evaluate financial stability, with actual liabilities demanding proactive management like cash flow planning, while contingents require monitoring for potential escalation. For example, a signed purchase contract for inventory creates an actual liability upon delivery, obligating payment without further conditions, whereas providing a guarantee on a third party's debt qualifies as contingent, activating only if the debtor defaults. Such boundaries clarify when an obligation transitions from potential to definite, guiding accurate financial reporting.^[2]^[3]

International Standards

IFRS and IAS 37

Under International Financial Reporting Standards (IFRS), the accounting for contingent liabilities is primarily governed by IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which establishes criteria for recognition, measurement, and disclosure to ensure that only genuine liabilities are recorded in financial statements.^[3] IAS 37 defines a contingent liability as either a possible obligation arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity's control, or a present obligation arising from past events that is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle it, or the amount cannot be measured with sufficient reliability.^[41] This definition distinguishes contingent liabilities from provisions, which are recognized liabilities of uncertain timing or amount.^[41] The recognition rule under IAS 37 prohibits the recognition of contingent liabilities as liabilities in the balance sheet; instead, they are not recorded unless the underlying obligation meets the criteria for a provision, such as when an outflow of economic benefits becomes probable (more likely than not).^[41] If the possibility of an outflow is remote, no disclosure is required, but if it is possible but not probable, disclosure in the notes to the financial statements is mandated to inform users of potential risks.^[41] For measurement, contingent liabilities themselves are not measured since they are not recognized; however, if a contingent liability evolves into a provision, it is measured at the best estimate of the expenditure required to settle the present obligation, discounted to present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability.^[41] Disclosure requirements for contingent liabilities under IAS 37 emphasize transparency, requiring entities to provide, for each class of contingent liability (unless the outflow is remote), a brief description of the nature of the contingency, an estimate of its financial effect (if practicable), indications of any uncertainties relating to the amount or timing of any resulting outflow, and the possibility of any reimbursement.^[41] These disclosures aim to enable users to assess the potential impact on the entity's financial position without speculative recognition.^[41] In the 2020s, IAS 37 has seen amendments and related developments enhancing its application, notably the May 2020 amendment Onerous Contracts—Cost of Fulfilling a Contract, which clarifies that the cost of fulfilling a contract for measuring an onerous provision includes both incremental costs and an allocation of other directly related costs, effective for annual periods beginning on or after 1 January 2022. Additionally, the International Accounting Standards Board (IASB) issued an exposure draft in November 2024 proposing targeted improvements to IAS 37, including clarifications on recognition criteria, discount rates for long-term provisions, and cost inclusions, to provide more consistent and useful information. As of November 2025, the IASB continues redeliberations on these proposals following the closure of the comment period in March 2025.^[15] In sustainability contexts, recent guidance under IFRS S2 Climate-related Disclosures (issued June 2023) and the joint IASB-ISSB exposure draft Climate-related and Other Uncertainties in the Financial Statements (September 2024), with illustrative examples published in October 2025, emphasize applying IAS 37's uncertainty disclosures to climate-related contingent liabilities, such as potential environmental remediation obligations, to better address risks like regulatory changes or physical impacts without altering the core standard. In June 2025, the IFRS Foundation published additional guidance on disclosures about transition plans under IFRS S2, further aiding the application to climate-related contingencies.^[42]^[43]

US GAAP and Other Frameworks

Under U.S. Generally Accepted Accounting Principles (GAAP), contingent liabilities are primarily governed by Accounting Standards Codification (ASC) Topic 450, issued by the Financial Accounting Standards Board (FASB). A loss contingency is recognized as a liability only if it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated.^[1] The term "probable" is defined in ASC 450-20-20 as the future event or events being likely to occur, which is generally interpreted by practitioners as a likelihood threshold exceeding 70%.^[9] If these criteria are not met but the contingency is reasonably possible (a likelihood greater than remote but less than probable), or if it is probable but not estimable, disclosure in the notes to the financial statements is required without recognition.^[11] For measurement under ASC 450-20-30, the accrued amount represents the best estimate of the probable loss; if no single amount is better than others within a range of possible outcomes, the minimum amount in the range is accrued, with the range disclosed.^[40] This approach emphasizes conservatism by avoiding overstatement while ensuring transparency about uncertainties. Gain contingencies, such as potential recoveries, are not recognized until realized but may be disclosed if probable.^[1] In contrast to International Financial Reporting Standards (IFRS), particularly IAS 37, U.S. GAAP under ASC 450 applies a higher probability threshold (probable, ~70%) for recognition without requiring a present obligation (legal or constructive) for all loss contingencies, whereas IAS 37 mandates a present obligation and uses a lower threshold (more likely than not, >50%) for provisions.^[44] This results in fewer contingencies being recognized as liabilities under U.S. GAAP compared to IFRS, though disclosure requirements for reasonably possible items are broader in GAAP.^[4] Other frameworks address contingent liabilities with variations suited to their scopes. The International Monetary Fund's Government Finance Statistics Manual 2014 (GFSM 2014) defines contingent liabilities for governments as potential obligations activated by specific future events, categorizing them as explicit (e.g., loan guarantees) or implicit (e.g., support for state-owned enterprises or financial system stability).^[6] These are generally disclosed outside the core balance sheet unless the triggering event occurs and recognition criteria (similar to probable and estimable) are met, emphasizing fiscal risk analysis for public sector reporting.^[45] European Union directives, such as Directive 2011/85/EU on requirements for budgetary frameworks, require member states to report contingent liabilities—including government guarantees, non-performing loans, and public-private partnership obligations—as part of the excessive deficit procedure to monitor fiscal sustainability.^[46] These are tracked separately from actual debt, with annual disclosures to the European Commission focusing on their potential impact on general government balances.^[47] Post-2022 developments in U.S. GAAP include considerations for climate-related contingencies under ASC 450, influenced by the Securities and Exchange Commission's (SEC) March 2024 adoption of climate disclosure rules—though the SEC voted on March 27, 2025, to end its defense amid litigation, leaving their status uncertain as of November 2025—which would have required registrants to assess and disclose material climate risks (e.g., physical or transition risks) that could manifest as loss contingencies if probable and estimable.^[48] The FASB's ongoing projects, including the December 2024 proposed Accounting Standards Update on environmental credit programs (Topic 818), which as of late 2025 remains under deliberation with a final standard expected by year-end, further aim to clarify recognition and disclosure of climate-linked obligations, such as carbon credits or emission-related liabilities, to address evolving environmental risks.^[49]

References

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[17]
Disclosure Update and Simplification - SEC.gov
May 27, 2025 · The amendments are intended to facilitate the disclosure of information to investors and simplify compliance without significantly altering the ...Missing: liabilities | Show results with:liabilities
[18]
SEC Maintains Focus on Contingent Liabilities
Aug 27, 2021 · An SEC enforcement action announced today highlights a continuing focus on timely disclosure of contingent liabilities.
[19]
5 Legal Proceedings And Contingent Liabilities - SEC.gov
A combined trial of the Mylan and 3M matter and the Teva and Catalent matter has been scheduled for June 2020. Product liability litigation. Nexium and Losec/ ...Missing: examples | Show results with:examples
[20]
Contingent Liabilities - SEC.gov
There can be no assurance that the Company will not experience material warranty, recall or product (or other) liability claims or losses in the future, or that ...Missing: examples | Show results with:examples
[21]
[PDF] Statement of Financial Accounting Standards No. 143
An environmental remediation liability that results from the normal operation of a long-lived asset and that is associated with the retirement of that asset ...
[22]
[PDF] The Litigation Environment of a Firm and its Impact on Financial Policy
Feb 28, 2011 · Theory suggests that management may be able to increase firm value through the strategic use of debt when facing contingent liabilities. This ...
[23]
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Summary of each segment:
[24]
Contingent liabilities - Merck Annual Report 2022
Mar 2, 2023 · The amount of the contingent liability is based on the best possible estimate which in turn is based on likelihood of possible outcomes of ...Missing: manufacturing | Show results with:manufacturing
[25]
[PDF] The Effects of Securities Class Action Litigation on Corporate ...
Apr 1, 2015 · The risk of securities class action litigation alters corporate savings and investment policy. Firms with greater exposure to securities ...
[26]
Contingent Government Liabilities: A Hidden Fiscal Risk
Good examples include the multiyear budgeting and reporting practices of Australia, Canada, Germany, and the Netherlands.
[27]
[PDF] Contingent Government Liabilities A Hidden Fiscal Risk
Common examples include state guarantees of debt and other obligations of subnational govermnents and various public and private entities, such as budgetary ...
[28]
[PDF] The Fiscal Costs of Contingent Liabilities: A New Dataset
Contingent liability realizations are a major source of fiscal distress, averaging 6% of GDP, but can reach 40% for major bailouts. They occur during growth ...
[29]
[PDF] Infrastructure State-Owned Enterprises and Fiscal Risks
2.2 Bailout Risk. Bailout risk refers to the implicit contingent liability risk associated with having to disburse large fiscal transfers to recapitalize an ...
[30]
[PDF] Contingent Financial Liabilities of the Federal Government
Sep 7, 2023 · Federal contingent liabilities include loan guarantees, insurance, housing, student loans, deposit insurance, and private pension insurance. ...
[31]
[PDF] The statistical recording of implicit pension liabilities and its impact ...
The recording of implicit pension liabilities in the core account of the SNA would mean that the accounting of unfunded pension schemes operated by governments ...
[32]
Addressing climate risks through fiscal policy in emerging and ...
In addition to the direct financial burden, climate disasters may trigger contingent liabilities, forcing governments to assume the fiscal costs of bailing out ...
[33]
Contingent liabilities and non-performing loans in 2020
Jan 31, 2022 · The highest overall rate of government guarantees was recorded in Finland (27.1% of GDP), ahead of Denmark (19.8%), Austria (19.1%), Germany (17.5%) and France ...Missing: post- | Show results with:post-
[34]
Policy Responses to COVID-19 - International Monetary Fund (IMF)
Loan guarantees: €25 billion in government guarantees to the European Investment Bank (EIB) to support up to €200 billion to finance to companies, with a ...
[35]
[PDF] Contingent-government-liabilities-a-hidden-risk-for-fiscal-stability.pdf
Common examples include state guarantees of debt and other obligations of subnational governments and various public and private entities, such as budgetary ...<|separator|>
[36]
Budgetary surprises: Fiscal costs of contingent liabilities - CEPR
Mar 15, 2016 · Subnational government bailouts, support to state-owned enterprises, and legal liabilities also give rise to substantial costs. Examples of ...Missing: commitments | Show results with:commitments
[37]
9.2 Recognition of provisions - PwC Viewpoint
Nov 30, 2022 · A contingent liability is not recognized. A contingent liability becomes a provision and is recorded when three criteria are met: (1) a present ...
[38]
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
A provision is a liability of uncertain timing or amount, meaning that there is some question over either how much will be paid or when this will be paid.
[39]
[PDF] U.S. GAAP vs. IFRS: Contingencies and provisions - RSM US
Accounting Standards Board's Accounting Standards Codification (ASC) Topic 450, ... contingent liability “a present obligation that arises from past events ...
[40]
https://rsmus.com/pdf/contingencies-provisions-at-a-glance.pdf
[41]
IASB proposes targeted improvements to requirements for provisions
Nov 12, 2024 · The proposed amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets would clarify how companies assess when to record ...
[42]
Accounting for legal claims: IFRS compared to US GAAP
Feb 28, 2019 · IAS 37, Provisions, Contingent Liabilities and Contingent Assets. IAS 37 has limited scope exclusions – e.g. rights and obligations under ...
[43]
Part C - The treatment of contingent liabilities in GFS
In GFS, a distinction is made between explicit contingent liabilities and implicit contingent liabilities. Paragraph 7.252 of the IMF GFSM 2014 defines these as ...
[44]
Contingent liabilities and non-performing loans
Contingent liabilities are potential, not actual, liabilities, important for policy, and include government guarantees, non-performing loans, and liabilities ...
[45]
Supplement on contingent liabilities and potential obligations ... - SCB
EU Directive 2011/85 specifies a number of requirements on Member States' budgetary frameworks. Budget data for government and social security funds is ...
[46]
The Enhancement and Standardization of Climate-Related ...
Apr 11, 2022 · The proposed rules would require information about a registrant's climate-related risks that are reasonably likely to have a material impact on its business.
[47]
FASB Releases Proposed ASU on the Accounting for Environmental ...
Dec 20, 2024 · The objective of the FASB's project on environmental credit programs is to improve the recognition, measurement, presentation, and disclosure requirements.Missing: post- | Show results with:post-