In general, a contingency can be defined as an existing condition or situation that is uncertain, where it cannot be known if a loss (and a related liability ) will result from the situation until one or more future events happen or do not happen.

There are three different approached that can be taken with contingencies:

1 recorded (or recognized)as a liability.

2 disclosed ( in the notes to the financial statements) and

3 not recorded or disclosed.

Scenario

Betteries4U was a manufacturer of batteries, portable lighting, and personal care products.

a.Year1(2009): it was identified as a "potentially responsible party" by a government environmental protection agency and told they might have to share in the cost of an environmental cleanup. Litigation was started. Batteries4U thought the probable outcome would be unfavorable.

b. Year2(2010): Batteries4U was able to reasonably estimate the cost of the clean-up.

What would be your approach in each year? Provide your explanation.