What Are the Three Types of Contingent Liabilities?

GAAP (generally accepted accounting principles) recognizes three categories of contingent liabilities, namely probable, possible and remote. Probable contingent liabilities can be reasonably estimated and has to be reflected in the financial statements. Possible contingent liabilities are as likely to occur as not and need only be disclosed in the footnotes of financial statement. Remote contingent liabilities are extremely unlikely to occur and do not need to be included in financial statements.

What Are Examples of Contingent Liability?

A pending lawsuit is a common contingent liability example because its outcome is unknown. However, if a company’s legal department thinks that the rival firm has a strong case, which means the contingent liability is probable, and they can estimate the loss, then the firm posts an entry on the balance sheet to account for the legal expenses as an accrued expense. A warranty is another common contingent liability because the number of products returned under a warranty is an unknown.