Example of Contingent Liabilities

Example of Contingent Liabilities

There is possible obligation and only will be confirmed on occurrence and non occurrence of a future event. It is also a present obligation which amount cannot be estimated reliably or the future economic benefit is not expected to outflow.

Obligation	Condition
Possible Obligation	Occurrence will be confirmed by future event
Present Obligation	1.      Reliable estimate cannot be made 2.      Future outflow is not expected

The following table shows how liability is to be accounted for

Liability	Likelihood
Certain	Accounted for
Probable	Accounted for
Possible	Disclosed
Remote	Ignore

Example of Contingent Obligation

The production of ABC & Co has damaged the environment and it is expected that fine will be imposed on ABC & Co for amount not less than 10 million. Two other companies with same violation were fined 15 million and 25 million respectively.

Solution

There are three amount involved i.e. 10 million , 15 million and 25 million and company expert are not sure about the amount of fine and therefore the provision cannot be created rather the obligation will be confirmed by court decision and therefore the liability may be disclosed.