Contingent Liability in Australia 2025: Business Risks & Management

Contingent liability isn’t just accounting jargon—it’s a critical concept that can reshape a business’s financial landscape overnight. In 2025, with regulatory updates and evolving economic risks, understanding contingent liabilities is more important than ever for Australian companies, from startups to ASX-listed giants.

What Is a Contingent Liability?

A contingent liability is a potential financial obligation that may arise depending on the outcome of a future event. Unlike a regular liability, it’s not certain—it sits in the background, waiting for a trigger. Think legal disputes, pending tax assessments, or guarantees on a subsidiary’s debt. If the event occurs, the liability becomes real; if not, it remains a footnote in the financial statements.

• Lawsuit risk: If a business is sued and the outcome is uncertain, any potential damages are a contingent liability until the court decides.

• Product warranties: Promises to repair or replace faulty goods only become an actual cost if customers make claims.

• Loan guarantees: If a business guarantees another party’s loan, it only becomes a liability if the other party defaults.

Why Contingent Liabilities Matter in 2025

The economic and regulatory landscape in Australia is shifting. The Australian Accounting Standards Board (AASB) has updated guidance on disclosure thresholds for contingent liabilities, pushing for greater transparency in 2025. Here’s why this matters:

• Investor confidence: Investors scrutinise contingent liabilities to gauge hidden risks that could affect a company’s valuation or solvency.

• Borrowing power: Lenders assess contingent liabilities before approving loans, as large or poorly managed risks can impact a business’s creditworthiness.

• Corporate governance: Boards are under greater pressure to identify, monitor, and disclose contingent risks—especially post-pandemic, as supply chain and litigation risks remain high.

Example: In 2024, a major Australian construction firm faced a class-action lawsuit over faulty cladding. The company had to disclose a substantial contingent liability in its 2024-25 financial report. When the court ruled in favour of the plaintiffs in early 2025, the contingent liability became an actual payout—impacting profits and share price overnight.

Managing and Disclosing Contingent Liabilities

Proper management of contingent liabilities is not just about compliance—it’s about strategic risk control. Here are key steps for Australian businesses in 2025:

• Robust risk assessment: Regularly review all business operations for potential legal, financial, and contractual risks that could give rise to contingent liabilities.

• Transparent disclosure: The AASB 137 standard requires that any probable and quantifiable contingent liabilities must be disclosed in the notes of financial statements. If the chance of occurrence is remote, disclosure may not be necessary, but judgement is key.

• Insurance coverage: Consider insurance products that can transfer some contingent risks off the balance sheet, such as professional indemnity or directors’ and officers’ liability insurance.

• Legal advice: Regular consultation with legal and financial advisors is crucial to evaluate the likelihood and potential impact of contingent liabilities.

• Proactive resolution: Where feasible, settle disputes early to prevent contingent liabilities from escalating into damaging actual liabilities.

2025 Policy Updates and What’s Next

Australian regulators are paying closer attention to contingent liabilities in 2025. The AASB and ASIC have both signalled stricter scrutiny on financial statement disclosures, especially for public companies and financial institutions. The Treasury’s ongoing review of corporate reporting may bring even tighter rules around transparency and stress-testing for contingent exposures.

For businesses navigating a landscape of climate litigation, cyber risk, and global supply chain shocks, contingent liabilities are no longer just a footnote—they’re a strategic priority. With accurate reporting and proactive risk management, Australian companies can turn potential threats into manageable challenges.