Questions:
What is the difference between contingent liability and provision?

What are the reporting requirements for contingent liabilities?

Reference answers:
1. A provision is a present obligation of uncertain amount and timing, as well (e.g. provision for bad debts). Contingent Liability is a possible obligation that results from past events and whose existence will rely upon the happening or non-happening of the future event.
2. Provision is a recognized liability whose occurrence is certain. A contingent liability is an unrecognized liability, meaning we do not pass any accounting entry for such liability. This is because:
    - It is not foreseeable that the settlement of that liability will need an outflow of funds.
    - An accurate estimation of the amount is not possible.
3. The occurrence of contingent liability is conditional or uncertain. Whereas the occurrence of provision is certain.
4.  Provision is accounted for at present and arises as a result of past events. Whereas contingent Liability is disclosed at present as a note to account for the outflow of funds which are likely to occur in future.

Contingent liabilities are liabilities that depend on the outcome of an uncertain event. These obligations are likely to become liabilities in the future.

Contingent liabilities must pass two thresholds before they can be reported in financial statements. First, it must be possible to estimate the value of the contingent liability. If the value can be estimated, the liability must have more than a 50% chance of being realized. Qualifying contingent liabilities are recorded as an expense on the income statement and a liability on the balance sheet.
If the contingent loss is remote, meaning it has less than a 50% chance of occurring, the liability should not be reflected on the balance sheet. Any contingent liabilities that are questionable before their value can be determined should be disclosed in the footnotes to the financial statements.

Companies operating in the United States rely on the guidelines established in the generally accepted accounting principles (GAAP). Under GAAP a contingent liability is defined as any potential future loss that depends on a "triggering event" to turn into an actual expense.


It's important that shareholders and lenders be warned about possible losses ,an otherwise sound investment might look foolish after an undisclosed contingent liability is realized. There are three GAAP-specified categories of contingent liabilities: probable, possible, and remote. Probable contingencies are likely to occur and can be reasonably estimated. Possible contingencies do not have a more- likely than-not chance of being realized but are not necessarily considered unlikely either. Remote contingencies aren't likely to occur and aren't reasonably possible.

Working through the vagaries of contingent accounting is sometimes challenging and inexact. Company management should consult experts or research prior accounting cases before making determinations. In the event of an audit, the company must be able to explain and defend its contingent accounting decisions.

Any probable contingency needs to be reflected in the financial statements—no exceptions. Remote contingencies should never be included. Possible contingencies those that are neither probable nor remote should be disclosed in the footnotes of the financial statements.

GAAP accounting rules require probable contingent liabilities ones that can be estimated and are likely to occur to be recorded in financial statements. Contingent liabilities that are likely to occur but cannot be estimated should be included in a financial statement footnotes. Remote (not likely) contingent liabilities are not to be included in any financial statement.