A contingency is a potential financial obligation that may occur depending on the outcome of a future event. It is recognized in accounting only if the event is probable and the amount can be reasonably estimated.
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Contingent liabilities must be disclosed in the notes to the financial statements if they are not probable but still possible.
If a contingent liability is probable and the amount can be reasonably estimated, it should be recorded as an expense and liability.
Examples of contingencies include lawsuits, product warranties, and environmental cleanup obligations.
The Financial Accounting Standards Board (FASB) provides guidelines on how to account for contingent liabilities under GAAP.
Contingencies are evaluated at each balance sheet date to determine if any adjustments or reclassifications are necessary.
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Related terms
currentLiabilities: Obligations due within one year or within the company's operating cycle.
probable: An accounting term that means more likely than not to occur.
disclosure: Providing information in the notes to financial statements when items do not meet recognition criteria.