Contingent liability is a liability that may occur or does not occur in future and also,
It fails to meet the recognition era and a genuine pre estimate cannot be made for the amount that meets the liability.
Thus, subjected to above, it cannot be recognised in the financial statement.

Contingent Liability in Financial Statements

Contingent liabilities are potential obligations that may or may not become actual liabilities depending on the outcome of a future event. Such liabilities are not recognised in the financial statements as they do not meet the criteria for recognition under the accounting standards.

Explanation

Contingent liabilities are disclosed in the notes to the financial statements as they have the potential to impact the financial position and performance of the entity. They are classified as either a possible obligation or a remote contingency based on the likelihood of the event occurring and the amount of the liability that can be estimated.

For example, a pending lawsuit against the entity is a contingent liability as the outcome is uncertain and the amount of any potential settlement or judgement cannot be reliably estimated. Similarly, a warranty obligation for a product sold by the entity is a contingent liability as the actual cost of repairs or replacements cannot be determined until the warranty claims are made.

Conclusion

In conclusion, contingent liabilities are not recognised in the financial statements as they are not actual obligations but potential ones that may or may not materialise in the future. However, they are disclosed in the notes to the financial statements to provide information to users about the potential risks and uncertainties that the entity faces.