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Contingent asset

What is a contingent asset?

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

The assets are contingent because they arise from unplanned or other unexpected events. For example, an entity is pursuing through the legal process, where the outcome is uncertain.

Contingent assets will not be recognised in financial statements until they are certain. But, these assets can be noted down in the adjacent notes to financial statements provided that certain conditions are met.

Indian Accounting Standard (Ind AS) 37

Ind AS 37 specifically states that

“Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which the change occurs. If an inflow of economic benefits has become probable, an entity discloses the contingent asset”.

In simple words,

  • If the inflow of economic benefits is virtually certain - The asset is not contingent and its recognition is appropriate
  • If the inflow of economic benefits is probable, but not virtually certain - No asset is recognized but disclosures are required.
  • If the inflow is not probable - No asset is recognized and no disclosure is required.

Examples of contigent asset

(i) PQR Ltd filed a legal suit against its supplier RSM Ltd for compensation against damages on non-supply of contracted goods. PQR Ltd. has concrete evidences that they are winning the case. The case has not been settled till the accounting year-end.

In the given case, it is probable that there would be an inflow of economic benefits to PQR Ltd in the future. So, it will be disclosed as a contingent asset in the Balance Sheet.

(ii) In the above example, if the court orders RSM Ltd to pay 50,000/- as compensation for damages. PQR Ltd has not yet received the money until the accounting year-end. Can it recognize this as a contingent asset?

In that case, PQR Ltd will recognize the compensation amount as an asset in the financial statements and not disclose it as a contingent asset, as this is virtually certain that PQR Ltd. will receive the compensation amount in the future.

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CA Rupali Gupta

CA Rupali Gupta