← Business Metric: Financial (all topics)
Contingent liabilities to net worth
What it is
Guarantees, disputed tax demands, litigation claims and other obligations disclosed in the notes but not recognised on the balance sheet, measured against shareholders' funds
They are off the balance sheet until they crystallise, at which point they are not
Impact on industries
- A contingent liability approaching or exceeding net worth is a solvency question that reported gearing does not show
- Disputed tax and litigation can persist for a decade and then settle suddenly, so the timing is outside management's control
- Disclosure is mandatory and reasonably detailed, so the exposure is visible to anyone who reads the notes
- Many contingencies never crystallise, particularly routine tax disputes, so the gross figure overstates the likely cost