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Thread: Classification and Definition of Contingent Liability

  1. #1

    Lightbulb Classification and Definition of Contingent Liability

    It is observed from published accounts of many a company that the following item is appended under the head “Contingent Liabilities”.
    “In respect of guarantee and counter-guarantee given by the
    Company against guarantee given by a Bank on behalf of the
    The arrangement is that Bankers of the Company furnish guarantee to the third parties for the due performance of the contract by the Company, for which they in turn demand counter-guarantee form the Company.
    To us, it appears that mention of the same as contingent liability of the Company is inappropriate. It would be the contingent liability of the Bank and not the Company, and as such, should have properly occurred in the Accounts of the Bank. In the event of breach of performance of the contract on the part of the Company, it would be an accrued and crystallized liability and not nearly a contingent liability.
    What is the correct accounting procedure to be adopted in such case for the purpose of preparation of accounts of the Company in accordance with the requirements of the Companies Act, 1956?

  2. #2


    contingent liability in respect of guarantees arises when a company issues guarantees to another person on behalf of a third party e.g. when it undertakes to guarantee the loan given to a subsidiary or to another company or gives a guarantee that another company will perform its contractual obligations.
    However, where a company undertakes to perform its own obligations, and for this purpose issues, what is called a “guarantee”, this does not represent a contingent liability and it is misleading to show such items as contingent liabilities in the Balance Sheet.

  3. #3

    Default Classification and Definition of Contingent Liability

    If the primary cargo insurance liability policy fails to provide coverage or isn't adequate enough to cover the entire loss, the contingent cargo liability policy takes over the claim and pays any remaining loss, subject to the conditions of the policy.

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