(Learning Objective 1: Interpreting a company’s contingent liabilities) PB Petroleum Inc., an oil company, included a disclosure in its annual report stating that it was denying a variety of litigations from environmental groups that arose following an incident on one of their rigs in the Gulf of Mexico.

How can a contingency liability become a real liability for the company? What would be the impact on the fi nancial statements if these claims are recognized as a provision instead of contingent liability?