What is a "contingent liability"?

A "contingent liability" refers to an obligation that may occur depending on the outcome of a future event that is uncertain. This type of liability does not require immediate payment since it has not yet materialized; it is only a potential obligation that depends on specific circumstances, such as the outcome of a lawsuit or warranty claim. Businesses typically disclose contingent liabilities in their financial statements if it is probable that the liability will arise and can be reasonably estimated.

In contrast, the other options describe different concepts: one outlines a guaranteed debt that must be repaid, reflecting a fixed obligation, while another describes an asset's potential decline in value. The last option refers to an obligation that has already been incurred, which does not involve uncertainty or the conditional nature associated with contingent liabilities. Thus, the correct answer effectively encapsulates the essence of a contingent liability as it pertains to potential future obligations.