Examples of Contingent Liabilities
"Subject to chance".
Any potential cost or loss will be seen by auditors as a candidate for a contingent liability. The most frequent examples are:
1). Pending litigation
2). Special tax assessments or notice of penalties
3). Warranties or guarantees
4). Exposure to foreign exchange losses
5). Potential bad debts
Contingency is only ever recorded for liabilities. Contingent gains, for example anticipating the value of an as yet unconfirmed bonus discount for having reached a target of purchases from a supplier are disregarded.
Auditing Contingent Liabilities
Some potential liabilities are more contingent than others, which is why your auditors have a duty to assess them.
They will classify them as being probable, reasonably possible or remote. Where the outcome is perceived to be probable and its value can be reliably calculated, the auditors may take the view that the contingent liability should be included in the financial statements. This is highly likely if the potential cost is also seen as significant.
Reporting Contingent Liabilities
A common example of a probable contingent liability is pending litigation.
For example if an ex-employee has taken a complaint against your business to an industrial tribunal or a court and it is clear that their claim is likely to be recognised, the potential cost of that will represent a probable contingent liability.
Provided that the costs can then be reliably estimated they will be charged to the profit and loss account as a specific provision and shown in the balance sheet details as a liability. The balance sheet will include the contingent liability in current liabilities if it is likely to be payable within twelve months or in long term liabilities if it is to be payable beyond that.
Brief details of the liability will also need to be disclosed in the footnotes below the balance sheet.
Footnoting Contingent Liabilities
If the outcome of a contingent liability is regarded as being probable but without reliable evidence to support a value for its potential liability or if it is regarded as being reasonably possible, it will not be included in the balance sheet. Details and values will instead be displayed below the balance sheet as a footnote.
Where the possibility of a contingent liability is seen as remote, it is not required to be recorded as a footnote.
My company has a dispute with a supplier who sold us a batch (£615) of marker pens of which most were dry and unsaleable. He is saying that the markers were ok when they left his premises so we must pay. We have said that if he takes us to court we will counter claim. Are we able to journal the cost of this order out of purchases and show it as a contingent liability?
The only possible contingent liability that could arise from what you describe is that if the matter goes to court and at the end of your financial year it remains unresolved but likely to go against you, the costs arising from the action would represent a contingent liability. The value of the consignment would then have to be written off. By the sound of it though none of this should arise if the markers delivered are genuinely unsaleable.
One of our customers has gone into administration owing us rather a large amount. We have secured part of the debt having already obtained judgement in the county court but some £7,000 remains outstanding. I have been told by the administrator that they always try to sell the business as a going concern so does the unsecured part of the debt qualify as a contingent liability or do we have to write it off?
You should write the debt off. Most administrative orders end up in receivership and liquidation, meaning that once fees and secured creditors have been settled, little if any cash is left for the unsecured creditors.
We already have a county court judgement for £3,550 of the total debt though. We were granted this before administrators were appointed. Does that make us a secured creditor for £3,550?
Unfortunately once a company goes into administration it comes under the jurisdiction of the Insolvency and Enterprise acts. Court judgements and warrants of execution no longer apply therefore and all such creditors unless they possess a prior and specific charge are then classified as being "unsecured".