What is Contingent Liabilities?
A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control. It is also a present obligation that is not recognised because it is not probable or cannot be reliably measured. Under IAS 37, contingent liabilities are disclosed but not recognised.
How It Works
- Identify the past event giving rise to the possible obligation.
- Assess the probability of an outflow: remote, possible, or probable.
- If probable and reliably measurable, recognise a provision; if only possible, disclose as contingent liability; if remote, no action.
- Update the assessment at each reporting date and reclassify if the probability changes.
Saudi Context
Saudi listed companies often disclose contingent liabilities related to ongoing tax assessments by ZATCA, customer or supplier litigation, and bank guarantees issued in favour of customers. The CMA reviews these disclosures during periodic filings, and auditors test the completeness of the contingent liability note.
Example
A Saudi company is sued for SAR 5 million by a former supplier. Legal counsel estimates a 30% chance of loss. The company discloses SAR 5 million as a contingent liability but does not recognise a provision.