A contingent liability is a liability incurred as a result of a loss contingency. Kieso, Weygandt & Warfield defines a contingency as an “existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.” Liabilities are contingent on one or more future events to confirm the potential loss, payee, date payable or even existence of the loss.
FASB identifies three categories to define the likelihood of losses that include probable, reasonably possible and remote. Liabilities that are probable and can be reasonably estimated should be accrued including pending litigation. The company should disclose the information that it has about the case including the probability of a favorable outcome and similarities to other cases.
Kieso, Weygandt, & Warfield. (2012). Intermediate Accounting. 14th ed. Hoboken, NJ: John, Wiley & Sons.

(a) Warranty costs are expensed as incurred under the cash-basis method. The costs are charged in the period in which the seller or manufacturer complies with the warranty. No liability is recorded for the future warranty costs and charges are not recorded at the time of sale. This method is normally used when the costs are immaterial or the warranty covers a short period. The cash-basis must be used when a liability is not probable or cannot be reasonably estimated.
However, if it is probable that a warranty will occur and the costs can be reasonably estimated, the accrual method must be used. The costs are charged as an expense in the year of the sale. The accrual method is the generally accepted method and should be used when the warranty is a vital and inseparable part of the sale.