Under accrual accounting, when should a contingent liability be recognized?

• A. Recognize if it is probable and estimable
• B. Disclose if probable but not estimable or reasonably possible
• C. Include provisions only for reasonably possible
• D. Do not report contingencies

Answer: (A)

In accrual accounting, you only recognize a contingent liability when there is a present obligation that is probable to occur and the amount can be reasonably estimated. When both conditions hold, you record a provision and recognize the related expense now, so the financial statements reflect the expected outflow and match the obligation to the period it relates to. This approach keeps the reporting faithful and precise: you acknowledge the likely loss and its estimated cost rather than waiting until it becomes certain or ignoring it altogether. If the loss is probable but the amount can’t be estimated, you disclose it in the notes rather than set a specific provision. If the loss is only reasonably possible, you also disclose as a contingent liability but do not recognize a provision. If the likelihood is remote, you neither recognize nor disclose.