Question

There are situations wherein a company faces a potential liability but is not certain of all the details associated with such potential liabilities

What type of liabilities are these called? Discuss the guidelines for handling these types of liabilities. Do you agree with how these are handled? If yes, then why? If not, then what would you recommend FASB do differently? Should potential gains be treated identically to potential liabilities? Why or why not?

Provide specific details to support your opinion in your response

Answer 1

These liabilities are called as Contingent Liabilities.

A contingent liability is either a possible obligation arising from past events and depending on future events not under an entity's control, or a present obligation not recognized because either the entity cannot measure the obligation or settlement is not probable.

You do not recognize a contingent liability. Instead, only disclose the existence of the contingent liability, unless the possibility of payment is remote.

Yes, I agree with how they are handled .Since they are not certain and have the status of possible obligation they should not be recognized in the books of accounts.

A Contingent Assets are the possible which arise from the pas event , whose existence is dependent on occurance or non-occurance of the future uncertain events, which are not in control of entity.

Contingent assets are only to be disclosed in the books of accounts and not be recognized.