If a contingency is likely and its financial impact can be assessed with reasonable certainty, a contingent obligation must be recorded. Three types of contingent liabilities are recognized by GAAP.
A contingent liability is what?
A contingent obligation is a responsibility that might materialize based on how a future event plays out. If a contingency is likely and the liability's amount can be anticipated with reasonable certainty, contingent liabilities are recorded. Unless all requirements are not met, the obligation may be mentioned in a footnote to the financial statements.
When Must I Recognize Contingent Liability?
You must be aware of the contingent responsibilities you have assumed if you own a firm or manage its finances. These also need to be recorded. Companies must record contingent liabilities in accordance with the three accounting principles of full disclosure, materiality, and prudence under both IFRS and GAAP (international financial reporting standards).
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