What is a contingent liability according to IAS 37?

A contingent liability, as defined by IAS 37, refers to a possible obligation that arises from past events and is contingent upon the occurrence of uncertain future events. This means that the liability is not certain or recognized on the balance sheet unless the future event occurs, making it a key aspect of accounting for potential liabilities.

This definition captures the essence of what distinguishes contingent liabilities from other types of liabilities. Unlike confirmed obligations that must be settled immediately or certain obligations with a fixed amount—which are recognized and reported in the financial statements—contingent liabilities are not recorded unless their occurrence is probable and can be reliably measured.

Furthermore, the concept of a contingent liability emphasizes the uncertainty involved, which is critical for informing stakeholders about potential risks that may affect the financial position of the company. Understanding contingent liabilities helps in assessing a company's risk profile and in making informed investment and management decisions.