Contingent liabilities are possible future liabilities that will only become certain on the occurrence of some future event. A contingent liability is less certain than a provision: the latter is expected to occur, a contingent liability might occur.
Common types of contingent liabilities include guarantees and the results of legal disputes. Guarantees may be given on behalf of an associate company, or as part of a larger deal (banks frequently give guarantees of various sorts as part of their business).
Contingent liabilities often do not ever become actual liabilities. If they are large they may nonetheless be enough of a risk to have a significant impact on valuation.
Investors should look out for large, unusual or potentially problematic contingent liabilities such as:
- guarantees given without apparent or sufficient reason
- contingent liabilities that do not fit in with the usual course of the business.