Question

A contingent liability that has a remote chance of occurrence should be disclosed in the financial statement footnotes.

True

False

Answer 1

The answer to above statement is 'FALSE'. Following explain the reasoning behind the answer:

A contingent liability is a liability which may or may not arise in the future, depending on the occurrence or non-occurrence of some future event. Therefore, in estimating contingent liability, a company needs to estimate the probability of the occurrence of this future event in question, and further, assuming its occurrence, estimate the amount of the liability.

As per GAAP, contingent liabilities are categorised into three categories as follows, and treated differently:

1. Probable : means that the occurrence of event is probably or likely, and the amount of liability can be fairly estimated. Such contingent liabilities which are likely and of which amount can be estimated, are recorded in the balance sheet and also in footnotes.

2. Possible : means the occurrence of the event is not likely but its possibility of occurrence can't be ruled out altogether. It is not likely but not remote too. Amount is not ascertainable. Such liabilities are not recorded in financial statetments but are recorded as footnotes to financial statements.

3. Remote : If the chances of occurrence of event are remote or very unlikely, such contingent liabilities are neither recorded in the financial statements nor are they disclosed in the footnotes. They are given no accounting treatment.

Therefore, for the question above, same not to be reported even in footnotes because the chances of occurrence are remote, hence, no treatment.