Contingent liabilities for a nonprofit refer to potential obligations or liabilities that may arise in the future due to uncertain events or circumstances. These liabilities are not certain to occur but are dependent on the occurrence of specific events, such as legal claims, pending lawsuits, warranties, or guarantees. Contingent liabilities have the potential to impact the financial position of a nonprofit if the events or circumstances they are contingent upon actually materialize.
Nonprofits are required to disclose significant contingent liabilities in their financial statements and accompanying notes, even if these liabilities are not yet recognized as actual obligations. The disclosure provides transparency to stakeholders about potential future financial risks that the nonprofit might face.
For example, a nonprofit might have a contingent liability related to a pending lawsuit. If the outcome of the lawsuit is uncertain, and the nonprofit could potentially face a financial settlement or judgment if the lawsuit is ruled against them, this would be considered a contingent liability.