Question

How are the terms “probable,” “reasonably possible,” and “remote” related to contingent liabilities?

Short answer

Probable is the kind of contingencies that refers to the contingencies that are expected to occur and can be evaluated. They must be recorded in the financial statements.

Reasonably possible refer to the contingencies whose occurrence is unlikely but are still possible. They should be recorded in the footnote of the financial statements.

Remote refers to the contingencies that are unlikely to occur. They should be recorded as a financial footnote.

Step-by-step solution

Definition of Contingent Liabilities

Contingent liability is not an actual liability but an anticipated liability (probable liability which may or may not become payable). It depends upon the happening of certain events or the performance of certain acts. An element of uncertainty is always attached. A contingent liability, thus, may or may not become a sure liability.

Ways to suggest that terms “probable,” “reasonably possible,” and “remote” are related to contingent liabilities

The term “probable” refers to the type of contingent liability that is recorded only when the loss is expected to occur, and one can make a fair assessment of the amount of the loss. Here, “probable” means that a future event is expected to occur. Hence, it is mandatory to explain the liability in the footnotes that follow financial statements.

The term "reasonably possible" refers to the type of contingent liability in which an event is less likely to occur but is still possible. Here, contingent liabilities are recognized only when the liability is reasonably possible to evaluate and not probable. Therefore, the makers of the financial statements should show the existence of contingent liabilities in the notes following such statements.

The term "remote" refers to a type of contingent liability that is not disclosed if the probability of its occurrence is remote. It means that the contingencies are neither probable nor “reasonably possible.” Thus, they are recorded as a financial footnote.