Contingent liabilities

A contingent liability is a challenge that may or may not impact a business, depending on future events. But is it possible to judge the impact of such a liability beforehand? Watch our engaging and easy-to-understand video from the #LearnWithUpstox series to find out.

Assume for a minute that you’re holding your friend’s pencil in your hand and you break it. When your friend gets to know about it, he will go to the teacher and tell her. But, till the time your friend doesn’t know, you’re safe. The moment he finds out, he goes to the teacher and you get scolded. 

And you, my friend, have a contingent liability on your hands. 

And now let’s get to know what contingent liability means?

But before that, let me welcome you to our new series - Learn with Upstox. 

In this series, we will talk about some key aspects of fundamental analysis, corporate actions, and some important general concepts about the stock market. 

And here, as you know, we’re going to talk about what Contingent Liabilities are and why you shouldn’t be ignoring them.

Let’s get going.

What is a Contingent Liability?

A company could have a similar experience as you did in our example. It could be facing a potential liability, but they don’t know whether or not it would be facing that liability. 

A contingent Liability is a potential liability that may occur depending upon the outcome of an uncertain future event. 

Is it possible to estimate the impact of a contingent liability?

In businesses, many such liabilities keep arising, especially in the pharmaceutical sector. Many Indian firms also do business in the US and there are constant lawsuits regarding patents or the formula that they’re using to make those medicines.

And because the justice system isn’t a day’s game, a lot of lawsuits are pending and we don’t know if the company will get a favourable ruling or not. This is a contingent liability. 

We don’t know the outcome of the liability and how it will affect the earning or the reputation of the company. 

And hence, while accounting, it’s not really easy to estimate accurately how the impact is going to be.

And that’s all for now. If you liked this article and want to learn more, feel free to browse through our blog as we have this entire series dedicated to helping you invest. In fact, you can also check out our YouTube channel for the same. 

Thank you and have a great day!