Final answer:
The notes of a financial statement should disclose the nature, potential financial impact, and likelihood of occurrence of a contingent liability, providing detailed information about potential future financial obligations of the company.
Step-by-step explanation:
In regard to a contingent liability, the notes of a financial statement should disclose the nature of the contingency, an estimate of the potential financial impact or a statement explaining why such an estimate cannot be made, and an indication of the likelihood that the liability will require a future economic sacrifice.
Essentially, contingent liabilities are potential liabilities that may occur, depending on the outcome of an uncertain future event. The notes should provide sufficient detail to inform users of the financial statements about the size and risks associated with these potential obligations.
For example, if a company is currently facing a lawsuit, the notes to the financial statements need to disclose the nature of the litigation, the possible outcomes, the estimates of the costs involved, or a statement that such costs cannot be estimated, and whether the possibility of losing the lawsuit is remote, reasonably possible, or probable. This information helps users assess the financial health and prospects of the company.