Which statement best describes a contingent liability?

The statement that describes a contingent liability is that it is a potential obligation dependent on future events. Contingent liabilities arise when there is a possibility that a certain event may occur, which would create an obligation for the entity. These liabilities are uncertain because they depend on future occurrences, such as the outcome of a lawsuit or the results of an audit, which makes them different from actual liabilities that are definite and unavoidable.

Understanding contingent liabilities is crucial for entities when preparing financial statements, as these liabilities must be disclosed under certain conditions. The requirement for disclosure relates to the likelihood of the event occurring and the ability to estimate the potential financial impact. If the event is remote, no disclosure might be necessary, but if it is probable and can be reasonably estimated, the entity must record it appropriately.

The other options do not accurately reflect the nature of contingent liabilities. Certain obligations represent established liabilities, whereas guaranteed payments from corporate officers pertain directly to confirmed payments and obligations. Loan covenants, on the other hand, relate to requirements associated with borrowing arrangements and do not capture the essence of potential future obligations dependent on uncertain events.