What is Contingent Liability And It's Types ?

Contingent Liability is the potential liability that might or might not evolve into obligations future. It is the potential future expense that depend on a triggering event to convert it into the actual loss.

It is off ghe the balance sheet item (found after the balance sheet). It is generally of three types..

1. Probable : it is recorded in the balance sheet ( generally a percentage of it ) as provisions.

2. Possible : High chance of converting into future liability. Not Recorded on the Balance Sheet

3. Remote : Low chances of converting into future liability. Not recorded in the balance sheet.

Contingent liabilities are very important, because it is very painful,when it becomes actual loss. But when making decisions It shouldn't be seen in isolation, compare with the equity (contingent liabilities % of equity). Can the equity of the company beer the loss.

Companies with contingent liabilities greater than it's market cap.Meaning these companies will go bankrupt, if it becomes actual loss.

Types of Contingent Liabilities...

1. Corporate Guarantee : Guarantee made by a company to the lender on behalf of it's subsidiary or related party, to repay the outstanding debt. If the subsidiary or related party is unable to pay.

Example : Zee Entertainment

2. Disputed Taxes( Direct / Indirect) : It is the disputed income tax or other legal tax case (sales tax, excise duty tax etc.) against the company, which are ongoing or delayed.

Example : Bharti Airtel, KRBL

3. Claims Against Company Not Acknowledged As Debt : These includes the labour union for additional wages, compensation, etc. 

Example : Noida Toll Bridge

4. Legal Cases Against Company : These are the Cases like land dispute, patent ownership, new law etc. , which are ongoing or delayed.