How are contingent liabilities disclosed in financial statements?

Contingent liabilities are potential obligations that may arise depending on the outcome of uncertain future events. Their disclosure in financial statements is guided by relevant accounting standards, which require that they be reported in the notes to the financial statements rather than being included in the main body of the balance sheet.

The rationale behind this approach is that contingent liabilities depend on future events that might or might not occur; therefore, they do not meet the criteria for recognition as actual liabilities on the balance sheet until the outcome is more certain. By disclosing them in the notes, users of the financial statements can be informed about potential obligations that could materially impact the company's financial position, allowing them to make more informed decisions.

This method of disclosure ensures transparency while recognizing the uncertainty surrounding contingent liabilities, as they do not represent present obligations but rather potential future claims that can arise. Hence, the correct answer emphasizes the importance of notes in providing additional context to the primary financial statements.