Contingent liabilities

Contingent Liabilities:::

Another feature of Balance Sheet to be closely analysed by the credit analyst is the
contingent liabilities. It often happens that at the time the Balance Sheet is drawn up, the
accountant is not fully aware of some obligations of the enterprise : they may or may not
accrue as a liability, because of dispute regarding their tenability as a claim against the
enterprise or if they do arise, he is not certain about their quantum. For instance, quality
disputes, tax appeals, etc. are obligations of this nature. These obligations are termed
contingent liabilities and must be detailed as a footnote. A few examples of these

contingent liabilities are :
i) Pending law-suits.
ii) Claims against the company not acknowledged as debts.
iii) Guarantees issued by the company
iv) Unexpired portion of Letters of Credit established by the Bank on behalf of the
unit.
v) Taxes and duties under dispute with authorities.
vi) Bills/Cheques discounted with bankers.
The relevance of these to the credit analyst lies in the likelihood of their occurrence. He
will have to examine each of these and judge for himself to what extent chances exist for
their materialising into real liabilities. If, in his judgment they are more likely to materialize,
he must make a suitable provision in his own analysis, by setting it off against the net
worth, even though the enterprise itself had not done so.