Discussion
As per which accounting convention 'contingent liability' is shown by way of a footnote below the Balance Sheet ?
Answer: B
Contingent liabilities are shown as a footnote under the convention of full disclosure.
The full disclosure convention requires the financial statements to reveal all information material to users' decisions. A contingent liability, such as a guarantee given for another party or a disputed claim pending in court, is not yet an actual liability and so is not entered in the balance sheet totals, but it could become one. It is therefore disclosed by way of a note.
Conservatism is about providing for losses but not anticipating gains. Materiality lets insignificant items be treated simply, and consistency requires the same methods year after year. None of them is the reason for the footnote.
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