If a contingent liability is only reasonably possible, what is required in financial reporting?

• A. Recognize a liability now
• B. Disclose in the notes
• C. Record as revenue
• D. Do nothing

Answer: (B)

Contingent liabilities are shown differently depending on how likely the obligation is. When a loss is only reasonably possible, you don’t record a liability on the balance sheet. Instead, you disclose the contingency in the notes to the financial statements, describing the nature of the obligation and, if possible, an estimate of the potential loss or range. This approach informs users without overstating liabilities. Recording as revenue is not appropriate, and doing nothing would hide a potential obligation, which is why disclosure is required.