What is a 'contingent liability'?

A contingent liability is defined as a potential obligation that may arise based on the outcome of a future event, such as a lawsuit or an unclaimed warranty. This means that the liability is not necessarily certain; it exists in the context of uncertainty tied to the event's occurrence. If the event does happen, the company may have to record the liability in its financial statements, typically depending on both the likelihood of the event occurring and the ability to estimate the amount of the liability reliably.

The other options describe different types of liabilities. A definite obligation requiring payment implies a liability that is certain and recognized on the balance sheet, rather than contingent. A liability guaranteed by a third party suggests involvement from another entity, which does not inherently capture the essence of a contingent liability, whose nature is uncertainty about the existence of the obligation itself. A non-financial obligation does not encompass liabilities related to monetary amounts at all and therefore does not fit the definition of contingent liabilities, which inherently deal with financial implications. This understanding of contingent liabilities is crucial for proper financial statement analysis and preparing for potential future obligations.