contingent liability

Definition

Hypothetical liability which depends on a possible (but hardly likely) event or situation to occur before becoming an actual liability. Contingent liabilities are different for every type of business and profession, and management makes provision for them by setting aside appropriate funds as reserves. Examples include acts of employees, credit guaranties, incomplete contracts, pending court cases, third party indemnities, unfilled purchase orders, unsettled disputes, etc. Under corporate-legislation, contingent liabilities must be disclosed in a balance sheet via an explanatory note (footnote).

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