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20 May, 14:47

What are the two criteria used to determine whether a contingent liability is reported in the financial statements?

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  1. 20 May, 18:16
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    Answer: probability and estimation

    Explanation: In simple words, contingent liabilities refers to those liabilities that may or may not arise and depends upon the happening of a future event. Potential law suits or loss due to labor strikes are some of the many examples of contingent liabilities.

    Contingent liabilities are recorded in the financial statements when the following two conditions can be fulfilled : -

    1. There is high probability that the liability will arise.

    2. The amount of liability can be reasonably estimated

    These liabilities are recorded so that the company can tackle the situation properly when such liabilities rises.
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