Under which circumstance are contingent liabilities recognized on the financial statements?

Contingent liabilities are not recognized on the financial statements in accordance with the International Financial Reporting Standards (IFRS), particularly under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. Instead, they are disclosed in the notes to the financial statements if certain criteria are met.

The defining characteristic of a contingent liability is that it arises from past events and will only be confirmed through the occurrence (or non-occurrence) of one or more uncertain future events, which are not wholly within the control of the entity. Such uncertainties mean that while there may be a possibility of an outflow of resources, it cannot be reliably measured at the present time. Therefore, they do not meet the criteria for recognition in the financial statements.

In contrast, an outflow being certain would lead to the recognition of a provision rather than a contingent liability. Similarly, acknowledging an obligation does not equate to recognizing it in the accounts if the future outflow is uncertain. Recognizing contingent liabilities would be inappropriate under any circumstances that align with the definition provided by IFRS, which is why they are disclosed rather than recognized in the financial statements.