Contingent Liabilities: Risks Hiding in the Notes

A cousin of mine co-signed a car loan for a friend in college. He signed once, forgot about it, and felt nothing change — no EMI left his account, no entry appeared in his passbook. Three years later the friend stopped paying, and the bank came to him. The debt had been his all along. It just lived in a place he never looked: the fine print of a paper he'd signed and filed away.

A company's balance sheet has the same fine print. It's called the notes to accounts, and the most dangerous obligations a business carries are often not on the balance sheet at all. They're parked one section over, under a heading most beginners scroll straight past: contingent liabilities.

What a contingent liability actually is

A contingent liability is a possible debt that might land on the company, depending on something it can't fully control — usually a court case, a tax demand, or a guarantee it gave on someone else's behalf. It isn't certain yet, so the accounting rules don't let the company record it as a real liability on the balance sheet. But it isn't nothing, either. So the rules force the company to disclose it — in the notes.

The accounting standard says this plainly. Under IAS 37 (and India's identical Ind AS 37): "A contingent liability is not recognised in the statement of financial position. However, unless the possibility of an outflow of economic resources is remote, a contingent liability is disclosed in the notes." (IFRS Foundation, IAS 37.)

Read that twice, because it's the whole trick. Not recognised on the balance sheet. Disclosed in the notes. The balance sheet — the page everyone looks at — is allowed to stay silent. The warning lives in a footnote. My cousin's loan, exactly: real obligation, invisible until you read the paper you filed away.

The three flavours you'll meet

Contingent liabilities come in a few common shapes, and once you know the names you'll spot them in any annual report:

• Tax disputes — the company filed its returns one way, the Income Tax or GST department disagrees and has raised a demand. The company is contesting it in appeal. If it loses, it pays. This is the single most common contingent liability in Indian annual reports.
• Litigation — a customer, supplier, employee, or regulator is suing for damages. The outcome is uncertain, so it sits in the notes until a court decides.
• Guarantees — the company has guaranteed a loan taken by a subsidiary, a joint venture, or an associate. If that other entity defaults, the bank comes to the parent. A co-signed loan, at corporate scale.
• Claims not acknowledged as debts — a catch-all for demands the company disputes and refuses to record.

None of these reduce profit today. None of them appear in the debt figure you'd pull off a screener. That's exactly why they're easy to miss — and why a beginner who only reads the headline numbers can buy a business that looks healthy and is, in fact, one court ruling away from trouble.

When the footnote walks onto the balance sheet

Here is the case every Indian investor should study, because it's the contingent liability that came true on the grandest scale: Vodafone Idea (NSE: IDEA).

For years, India's telecom companies disclosed a dispute over how "adjusted gross revenue" (AGR) — the base on which they pay licence and spectrum fees to the government — should be calculated. The companies said it covered only telecom revenue. The Department of Telecom said it covered everything, including non-telecom income like interest and rent. While it was a dispute, the disputed amount sat where disputes sit: in the notes, as a contingent liability. Not on the balance sheet.

Then the footnote came to life. In October 2019 the Supreme Court upheld the government's wider definition, and the telecom companies' later curative petitions were dismissed (LiveLaw, September 2024). On 1 September 2020 the Court gave the operators ten years to pay the dues (The Wire, September 2020). A "possible obligation" in a footnote became a real one, payable in cash, almost overnight.

Look at what the rest of the company looked like when that bill landed. In FY25, Vodafone Idea did about ₹43,571 crore of revenue and made an operating profit of roughly ₹18,127 crore — but its interest cost alone was about ₹24,544 crore, more than the entire operating profit, so the company posted a net loss of about ₹27,383 crore for the year (Inve data, 2026). Its borrowings sat above ₹2.3 lakh crore, and its reserves were deeply negative — meaning accumulated losses had wiped out the company's net worth. Into that balance sheet walked a government dues bill that had, for years, been a footnote.

The number kept moving even after the verdict. As recently as April 2026, the DoT revised Vodafone Idea's AGR dues down to ₹64,046 crore from an earlier ₹87,695 crore and stretched the payments out to FY41 (Business Today, April 2026). The point isn't the exact figure on any given day. The point is that a single line in the notes turned out to dwarf a year's revenue. An investor who skipped the footnotes never saw it coming. An investor who read them had years of warning.

(This is an example of how contingent liabilities behave, not a view on the stock. Whether Vodafone Idea is worth owning at any price is a separate question this article does not answer.)

How to read the note without an accounting degree

You don't need to understand every clause. You need three quick checks, done in five minutes:

1. Find the number and size it. Open the annual report — if the document still feels intimidating, here's how to read one like an analyst — go to the notes, find "Contingent liabilities and commitments." Take the total and compare it to two things: the company's net worth (equity capital plus reserves) and its yearly profit. A contingent liability that's a small fraction of net worth is usually routine. One that's a large multiple of net worth — or bigger than a few years of profit — is a real risk, even if it never crystallises.
2. Read what it's for. A pile of small, routine tax disputes is normal for any large Indian company — almost everyone is in appeal with the tax department over something. A single huge claim, a guarantee for a struggling group company, or a regulatory case that could change the whole business model is a different animal. Same line item, very different meaning.
3. Watch it across years. Pull two or three annual reports and track whether the contingent liability is growing, shrinking, or moving onto the balance sheet as an actual provision. A number that keeps swelling, quarter after quarter, is the company telling you the dispute is getting worse — if you're reading.

That last check is the hard one by hand. Reading one footnote is easy. Reading the footnotes for ten or fifteen holdings, every year, and noticing which disputes are quietly growing and which management commitments around them have gone silent — that's the grind nobody has time for. It's the same job Inve's concall summaries and Promise Tracker exist to take off your plate: surfacing what management actually said about a looming liability, and whether they've gone quiet on it since.

The owner's habit

Think of the notes as the part of the house inspection nobody enjoys — the foundation, the wiring, the title deed. The balance sheet is the freshly painted living room. Most people buy on the living room. The few who check the foundation are the ones who don't get a nasty surprise three years in.

The cost of skipping this isn't theoretical. The companies that hurt long-term owners most are rarely the ones that looked bad on the face of it. They're the ones that looked fine on the balance sheet and carried the real problem in a footnote — a tax demand, a guarantee, a lawsuit — that the owner never read until it stopped being contingent. Pair this habit with the rest of the foundations: what you actually own when you buy a share, and the margin of safety that protects you when a footnote turns real.

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