Contingent Assets Meaning, Explanation and FAQs

what is contingent assets

There are certain cases where the occurrence of some particular events or the non-occurrence of such events led to the formation of a contingent asset. The company doesn’t have control over such events and hence the economic interest which arises from such contingent gains is something that is important. A great contingent asset example is that a company when locked in certain legal disputes gets a fairly good chance of winning or getting some entitlements to make claims. Definition of Material (Amendments to IAS 1 and IAS 8), issued in October 2018, amended paragraph 75. An entity shall apply those amendments prospectively for annual periods beginning on or after 1 January 2020.

  1. Accordingly, regardless of whether an entity applies IAS 12 or IAS 37 when accounting for interest and penalties, the entity discloses information about those interest and penalties if it is material.
  2. So, the liabilities rising during those situations will be known as contingent liabilities.
  3. An entity shall apply those amendments prospectively for annual periods beginning on or after 1 January 2020.
  4. Once that approval has been obtained and communicated to the other parties, the entity has a constructive obligation to restructure, if the conditions of paragraph 72 are met.

Contingent assets also crop up when companies expect to receive money through the use of a warranty. Other examples include benefits to be received from an estate or other court settlement. Anticipated mergers and acquisitions are to be disclosed in the financial statements. Based on this same example, Company XYZ would need to disclose a potential contingent liability in its notes and then later record it in its accounts, should it lose the lawsuit and be ordered to pay damages.

Accordingly, this Standard neither prohibits nor requires capitalisation of the costs recognised when a provision is made. IFRS Accounting Standards are, in effect, a global accounting language—companies in more than 140 jurisdictions are required to use them when reporting on their financial accounting policies health. Where any of the information required by paragraphs 86 and 89 is not disclosed because it is not practicable to do so, that fact shall be stated. No obligation arises for the sale of an operation until the entity is committed to the sale, ie there is a binding sale agreement.

If it becomes virtually certain that there will be an inflow of economic benefits, the corresponding asset and related income are to be recognised in the period in which this certainty arises. Moreover, if the likelihood of an economic benefit inflow increases to the level of probability, the entity is required to disclose the contingent asset (IAS 37.35). Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements.

IAS 37 — Provisions, Contingent Liabilities and Contingent Assets

As noted in paragraph 29, an obligation for which an entity is jointly and severally liable is a contingent liability to the extent that it is expected that the obligation will be settled by the other parties. The Committee observed that paragraph 47 of IAS 37 states that ‘risks specific to the liability’ should be taken into account in measuring the liability. The Committee noted that IAS 37 does not explicitly state whether or not own credit risk should be included.

what is contingent assets

However, unless the possibility of an outflow of economic resources is remote, a contingent liability is disclosed in the notes. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain. Accordingly, regardless of whether an entity applies IAS 12 or IAS 37 when accounting for interest and penalties, the entity discloses information about those interest and penalties if it is material. It is imperative that the contingent assets are completely monitored in a close manner.

Board Approvals

Conversely, the other party that is probably going to lose the lawsuit must record a provision for the contingent liability as soon as the loss becomes probable, and should not wait until the lawsuit has been settled to do so. Thus, recognition of the contingent liability comes before recognition of the contingent asset. Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity.

what is contingent assets

In these notes for contingent assets and liabilities, we are going to discuss both of these topics so that students can have an idea about the chapter and can score good marks in the examinations. Not knowing for certain whether these gains will materialize, or being able to determine their precise economic value, means these assets cannot be recorded on the balance sheet. However, they can be reported in the accompanying footnotes of financial statements, provided that certain conditions are met. These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the end of the reporting period. Such expenditures are recognised on the same basis as if they arose independently of a restructuring.

Contingent assets

For a plan to be sufficient to give rise to a constructive obligation when communicated to those affected by it, its implementation needs to be planned to begin as soon as possible and to be completed in a timeframe that makes significant changes to the plan unlikely. Future events that may affect the amount required to settle an obligation shall be reflected in the amount of a provision where there is sufficient objective evidence that they will occur. Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. The Interpretations Committee noted that when the IASB withdrew IFRIC 3, it affirmed that IFRIC 3 was an appropriate interpretation of existing IFRS for accounting for the emission trading schemes that were within the scope of IFRIC 3. However, the IASB acknowledged that, as a consequence of following existing IFRS, IFRIC 3 had created unsatisfactory measurement and reporting mismatches between assets and liabilities arising from emission trading schemes.

Accounting for a Contingent Asset

Where a provision and a contingent liability arise from the same set of circumstances, an entity makes the disclosures required by paragraphs 84⁠–⁠86 in a way that shows the link between the provision and the contingent liability. As required by paragraph 51, gains on the expected disposal of assets are not taken into account in measuring a restructuring provision, even if the sale of assets is envisaged as part of the restructuring. A provision for restructuring costs is recognised only when the general recognition criteria for provisions set out in paragraph 14 are met.

Disclosure of the uncertainties surrounding the amount of the expenditure is made under paragraph 85(b). Accruals are often reported as part of trade and other payables, whereas provisions are reported separately. In April 2001 the International Accounting Standards Board adopted IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which had originally been issued by the International Accounting Standards Committee in September 1998. That standard replaced parts of IAS 10 Contingencies https://www.kelleysbookkeeping.com/horizontal-and-vertical-analysis/ and Events Occurring after the Balance Sheet Date that was issued in 1978 and that dealt with contingencies. IFRS Sustainability Standards are developed to enhance investor-company dialogue so that investors receive decision-useful, globally comparable sustainability-related disclosures that meet their information needs. Our Standards are developed by our two standard-setting boards, the International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB).

An entity shall apply those amendments when it applies the amendments to the definition of material in paragraph 7 of IAS 1 and paragraphs 5 and 6 of IAS 8. Although a constructive obligation is not created solely by a management decision, an obligation may result from other earlier events together with such a decision. For example, negotiations with employee representatives for termination payments, or with purchasers for the sale of an operation, may have been concluded subject only to board approval. Once that approval has been obtained and communicated to the other parties, the entity has a constructive obligation to restructure, if the conditions of paragraph 72 are met. Evidence that an entity has started to implement a restructuring plan would be provided, for example, by dismantling plant or selling assets or by the public announcement of the main features of the plan.


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