Contingent liabilities represent situations where a company might have a financial obligation depending on whether a certain future event occurs. For instance, if a company is currently involved in litigation, it may need to pay damages if the lawsuit is lost; this potential payment constitutes a contingent liability. These liabilities are not actual obligations at the moment but are noted in the financial statements as a possibility. Properly recognizing and managing such liabilities is crucial for accurate financial reporting and decision making by stakeholders. For example, a contingent liability related to a product warranty might be disclosed to inform users of the financial statement about possible future claims.