A contingent liability is a possible obligation that will only become real if something outside the company's control happens – a customer wins a legal claim, or a company whose overdraft you have guaranteed fails to pay. Because payment is not probable, nothing is recorded in the balance sheet, but readers need to know about it.
What this note shows
A description of each contingent liability, with an estimate of its financial effect where practicable. Small companies must disclose the total amount of financial commitments, guarantees and contingencies not included in the balance sheet (FRS 102 Section 1A, following SI 2008/409 Schedule 1).
| Situation | Treatment |
|---|---|
| Outflow probable and can be reliably estimated | A provision – recorded in the accounts (see provisions for liabilities) |
| Outflow possible but not probable | A contingent liability – disclosed in this note |
| Outflow remote | Usually not disclosed |
The note is part of FRS 102 Section 1A accounts. In FRS 105 accounts, use the "Contingent liabilities" section of the Guarantees and other financial commitments note.
Where the information comes from
This is a text note; nothing is pulled from the trial balance. Typical sources are bank facility letters (cross-guarantees between group companies), solicitors' letters about claims, and board minutes. Ask the directors whether the company has guaranteed anyone else's obligations or faces any disputes.
If the company has guaranteed a director's personal borrowing, disclose it in the guarantees provided on behalf of directors note instead, which covers the Companies Act 2006 s413 disclosure.
Completing the note in Tax Optimiser
Open the period, choose View Accounts, then Notes in the left Actions menu. Select Contingent liabilities in the list.
- Set Show this note in the accounts to Yes.
- Click Use Template and choose the wording that fits, entering any figures and names when prompted – or type your own.
- Click Save changes to save the note and rebuild the accounts preview.
The demo company has no contingent liabilities and uses the No contingent liabilities template to say so. Applying a template replaces the text in the box, so if you have more than one item, apply one template and type the rest.
Wording templates
- Guarantee given – a guarantee given to a third party, with no liability expected to arise. You are asked for {{GuaranteeAmount}} and {{Beneficiary}}.
- Legal claim – an outstanding claim against the company, its estimated financial effect, and why no provision has been made. You are asked for {{ClaimDescription}} and {{EstimatedAmount}}; the year-end date is filled in for you.
- No contingent liabilities – a nil statement at the year end. Nothing to enter.
How it appears in the accounts
The note prints its heading and your text as a plain paragraph.
Frequently asked questions
What is a contingent liability in small company accounts?
A possible obligation that depends on a future event outside the company's control, such as a guarantee being called or a legal claim succeeding. It is disclosed in a note rather than recorded in the balance sheet.
When does a contingent liability become a provision?
When it becomes probable that the company will have to pay and the amount can be estimated reliably. It is then recorded as a provision in the accounts.
Do I need to say there are no contingent liabilities?
It is not required, but many accountants include a nil statement for completeness. The "No contingent liabilities" template provides the wording.
Where do I disclose a guarantee given for a director's personal loan?
In the guarantees provided on behalf of directors note, which covers the Companies Act 2006 s413 disclosure. A director guaranteeing the company's own borrowing is different and is not a contingent liability of the company.