Note: This is the third article in a four-part series on quandaries for bankruptcy trustees as they evaluate contingent liabilities against, and the solvency of, companies in bankruptcy. Read parts one and two.
Valuing Contingent Liabilities
In order to evaluate the point at which a company was insolvent (“the sum of the entities debts is greater than all of such entity’s property, at fair value”), a Trustee must first identify, and then determine the fair value of, the company's contingent liabilities. While the accounting literature provides guidance on when and in what manner a contingent liability must be recorded, the literature does not provide guidance on how to value those contingencies, other than to state the contingent liability should be recorded at its fair value.