Contingent Assets- Sometimes you will see there is a probability of getting something in your life. You will be uncertain about that thing and when you are uncertain then that will be your contingent assets or liability. And in this post, you will learn all faqs related to contingent assets and that will help you to understand it deeply.
Contents of this post
What are Contingent Assets?
Contingent Assets are a possible asset that arises from past events and their existence will be confirmed only after the occurrence or non-occurrence of one or more uncertain future events.
What is the meaning of Contingent Asset?
As per the concept of prudence as well as the present accounting standards, an enterprise should not recognize a contingent asset. These assets are uncertain and may arise from a claim that an enterprise pursues through a legal proceeding.
There is uncertainty in the realization of the claim. It is possible that recognition of contingent assets may result in recognition of income that may never be realized. However, when the realization of income is virtually certain, then the related asset no longer remains a contingent asset.
How will you define Contingent Asset?
A contingent asset may be defined as a possible asset that arises from past events and whose existence will be confirmed only after the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the business entity.
What are contingent Assets examples?
You can see many examples of Contingent Assets and some of them are given below-
- A claim that an enterprise is pursuing through the legal process, where the outcome is uncertain, is a contingent asset.
- A Roads and Highway Developer Cost Overrun Litigation Against Roads and Highway Authority.
- The possibility of Gaining from a Lawsuit Against a Company for Patent Infringement.
- Any type of Lawsuits
- Any receiving money through the use of a warranty may record that gain as a contingent asset.
- Estate settlements
- Bank guarantee
- Change in foreign exchange
- Change of Government policy
- Further mergers and acquisitions
What are the features of Contingent Assets?
These are the features of Contingent Assets-
- The amount of benefits is uncertain.
- These assets are not recognized and disclosed in financial statements but they are disclosed when it is more likely that an inflow of benefits will occur. However, when the inflow of benefits is virtually certain, an asset is recognized in the statement of financial position because that asset is no longer considered to be contingent.
- It is generally disclosed in the director’s statement.
- When there is a certainty of realizing such an Asset, it no longer remains a Contingent Asset. It becomes an actual asset recognized and represented in the Balance Sheet.
- It is a possible gain to an Enterprise whose occurrence depends on an uncertain future event.
How are contingent assets different from contingent liability?
| NO | Contingent Assets | Contingent Liability |
|---|---|---|
| 1 | A possible asset arises from past events and their existence will be confirmed only after the occurrence or non-occurrence of one or more uncertain future events. | A possible obligation arising from past events may arise in the future depending on the occurrence or non-occurrence of one or more uncertain future events. |
| 2 | A contingent asset may be defined as a possible asset | A contingent asset may be defined as a possible obligation |
| 3 | Benefits are uncertain | Losses are uncertain |
How should contingent assets be recognized?
Contingent assets are not recognized, but they are disclosed when it is more likely that an inflow of benefits will occur. However, when the inflow of benefits is virtually certain, an asset is recognized in the statement of financial position because that asset is no longer considered to be contingent.
How do you disclose contingent assets?
A contingent asset need not be disclosed in the financial statements. A contingent asset is usually disclosed in the report of the approving authority (Board of Directors in the case of a company, and the corresponding approving authority in the case of any other enterprise) if an inflow of economic benefits is probable.
Contingent assets are assessed continually and if it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognized in the financial statements of the period in which the change occurs.
How are contingent assets treated?
A contingent asset becomes a realized asset recordable on the balance sheet when the realization of cash flows associated with it becomes relatively certain. In this case, the asset is recognized in the period when the change in status occurs.
Why are contingent assets not Recognised?
According to the accounting standards, a business does not recognize a contingent asset even if the associated contingent gain is probable. A contingent asset becomes a realized (and therefore recordable) asset when the realization of income associated with it is virtually certain.
How to do accounting for a Contingent Asset?
According to the accounting standards, a business does not recognize a contingent asset even if the associated contingent gain is probable. A contingent asset becomes a realized (and therefore recordable) asset when the realization of income associated with it is virtually certain. In this case, recognize the asset in the period when the change occurs.
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