Contingent assets and liabilities

contingent assets and liabilities

What Is A Contingent Asset?

Contingent asset is a possible asset which arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events which are not wholly within the control of the company. It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the company. Contingent asset is not recognized and disclosed in financial statements as it may result in the recognition of gain that may never be realized. It is usually disclosed in the director’s report. When the realization of gain is certain then it does not remain a contingent asset but becomes an actual asset and is recognized and disclosed in the financial statements. An example of contingent asset would be the possibility to receive compensation from a lawsuit where the outcome of case and amount of compensation is not yet known.

What Is A Contingent Liability?

Contingent liability is a possible obligation which arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the company. It usually arises from unplanned or unexpected events that give rise to the possibility of an outflow of economic benefits from the company. Contingent liability is not recognized and disclosed in financial statements. It is disclosed by way of a note to the financial statements. When the incurring of loss is probable and the amount of loss can be estimated then it does not remain a contingent liability but becomes an actual liability and is recognized and disclosed in the financial statements as provision. Some of the examples of contingent liabilities are:-
– Lawsuit against the company in which the company may have to pay compensation where the outcome of case and amount of compensation is not yet known.     
– Possible penalty for copyright or patent infringement where the outcome of  case and amount of penalty is uncertain.
– Possible fine for not following a government law.
– Arrears of dividend on cumulative preference shares.
– Bills discounted but not yet matured.

There are some differences in disclosure and recognition of contingent assets and liabilities:-
Contingent assets are not required to be disclosed but contingent liabilities are required to be disclosed.
If contingent liabilities are disclosed, they are generally disclosed in the report of Board of Directors whereas contingent liabilities are disclosed by way of note to balance sheet.
Contingent assets are recognized as actual assets in the financial statements only if the realization of gain is certain whereas contingent liabilities are recognized as actual liabilities in the financial statements even if the incurring of loss is not certain but is probable and the amount of loss can be estimated.

Difference Between Contingent Asset And Other Asset And Contingent Liability And Other
Liability:-

Contingent
Asset
Other Asset Contingent
Liability
Other Liability
It is a possible asset whose occurrence depends on an event which may or may not happen in future. It is a present asset which has already occurred because of the happening of a past event. It is a possible obligation whose occurrence depends on an event which may or may not happen in future. It is a present obligation which has already occurred because of the happening of a past event.
The inflow of economic benefits is not certain. The inflow of economic benefits is certain. The outflow of economic benefits is not certain. The outflow of economic benefits is certain.
It is not recognized and disclosed in financial statements. It is recognized and disclosed in financial statements. It is not recognized and disclosed in financial statements. It is recognized and disclosed in financial statements.
It is usually disclosed in the director’s report. It is disclosed on the assets side of balance sheet. It is disclosed by way of note to the balance sheet. It is disclosed on the liabilities side of balance sheet.

 

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