Explain the difference between a contingent liability and a regular liability.

Contingent liability depends on future events.

• Potential obligation from uncertainties.

• Regular liabilities are current debts.

• Recognized on balance sheet now.

In what scenario would a contingent liability be disclosed in financial statements?

A contingent liability should be disclosed in the notes to accounts unless the possibility of an outflow of resources is remote.

Fill in the blank: Contingent assets become recognized in financial statements when the inflow of economic benefits becomes __________.

Virtually certain

True or False: A provision is recognized when an obligation is probable and measurable.

True

Describe the recognition criteria for provisions.

Provisions are recognized under specific criteria.

• Present obligation exists.

• Probable resource outflow.

• Reliable estimate of amount.

What happens to a contingent liability when it becomes likely that an outflow of resources will be necessary?

When it becomes likely, a provision is recognized in the financial statements for the period in which this change in probability occurs.

Explain how a legal claim can be considered a contingent asset.

A legal claim is a contingent asset.

• Depends on legal outcomes.

• May yield economic benefits.

• Involves uncertainty in cases.

True or False: Contingent assets must always be disclosed in financial statements.

False. Contingent assets do not have to be disclosed unless the inflow of economic benefits is probable.

A contingent liability

What defines a contingent asset and under what circumstances can it be recognized in financial statements?

Contingent assets have specific recognition criteria.

• Arise from past events.

• Confirmed by uncertain future events.

• Recognized when income is nearly certain.