contingent liability

A potential liability that may develop into an actual liability if some specified event occurs, such as not paying a bill. The Financial Accounting Standards Board (FASB) says that a company should record a contingent liability in its accounting records if the liability is probable; it also must be reasonably estimated. A contingent liability may be a potential judgment from a lawsuit, lines of credit that may not be repaid, loan commitments that the company may have, or the impact from foreign exchange transactions or other financial contracts. A contingent liability also occurs when a company sells its accounts receivables to a purchaser; however, if the customer defaults on payment, then the seller of the accounts receivable is contingently liable.