Contingent Liability

Why it is necessary to create contingent liability? How this liability helps the banker to relieve from the future liability due to default in payment by the concerned party?

Questions by moktan

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  • Oct 6th, 2008

It is not necessary to create contingent liabilities.

If any such liability exists then it must be shown in the balance sheet. But you don't have to create any for the heck of it.

Moreover it does not help in anything if you show your contingent liabilities in balance sheet. It only keeps investors informed of the possible expenses the company may have to face. If contingent liabilities are not shown in balance sheet and one day company spends on something a huge amount then investors would be taken aback.

For better disclosure of the financial figures contingent liabilties must be disclosed. There is no other purpose. Moreover the investors also can question management if any liability is shown as contingent for too long.

There is no other purpose.

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