What is a Contingent Asset?
Contingent asset is a possible asset of the company that may arise in the future on the basis of happening or non happening of any contingent event which is beyond the control of the company and will be recorded in the balance only if it becomes certain that the economic benefit will flow to the company.
In simple words, A Contingent asset is the potential economic benefit that may arise to a company or enterprise based on an occurrence of uncertain future events. The Company does not have any control over the occurrence of such future events.
- It is a possible gain to an Enterprise whose occurrence depends on an uncertain future event.
- The amount of economic benefits is uncertain.
- These assets are not recognized and disclosed in financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels., unlike contingent liability, which is disclosed in a financial statement by way of notes to account.
- It is generally disclosed in the director’s statement.
- When there is a certainty on a realization of such Asset, it no longer remains Contingent Asset and becomes an actual asset that is recognized and represented in the Balance SheetRepresented In The Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company..
In similar ways, Contingent Liability is the potential liability that may arise to an enterprise based on an occurrence of uncertain future events not in control of the Company/Enterprise. Contingent Liability is reported in the company’s annual report by way of notes to accounts or specific sections dedicated to Contingent Liability. However, Contingent Asset does not form part of the Company’s Annual Report unless it becomes certain.
Example of Contingent Asset
A Roads and Highway Developer Cost Overrun Litigation Against Roads and Highway Authority
A Roads and Highway developer (‘Developer’) filling a cost overrun litigation against Roads and Highway Authority (‘Authority’) for reimbursement of cost overrun incurred by the Developer on account of delay in handing over the land by Authority to Developer for construction of the Project;
As per the Contract between Developer and Authority, land acquisition for the project was supposed to be carried out by the Authority and was to be handed over to Developer in a definite timeframe. Since the Authority could not hand over the required land to Developer for the development of the Project as per schedules in the contract leading to an increase in overall project cost, Developer files litigation against the Authority for reimbursement of incremental cost incurred by the Developer.
Below is the table for demonstration purpose-
|Estimated Project Cost as per Contract = A||100|
|Actual Completed Project Cost = B||150|
|Cost Overrun due to delay in land handover = A-B||50|
Note – This is based on the assumption that the entire cost overrunEntire Cost OverrunCost overrun, also known as budget overrun, is a scenario in which the cost of a project or business tends to rise above what was budgeted for. This can be due to improper budgeting or underestimating of the actual cost owing to unforeseen scenarios that were not factored into the budgeting process. was on account of delay in handing over of land to Developer by the Authority.
In the above demonstration, the Developer has filed litigation against the Authority for reimbursement of $ 50 million, which is the incremental cost incurred due to delay on the part of Authority. Therefore, Contingent Asset, in this case, is $ 50 million. This asset shall not be recognized in Developer’s Audited ReportAudited ReportAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements. unless there is a certainty for reimbursement of cost overrun amount from the Authority.
Once this litigation is awarded to the Developer by the relevant Authority, this will become an Asset, which will be recognized in the Balance Sheet of the Developer.
The possibility of Gain from a Lawsuit Against a Company for Patent Infringement
Another example is the possibility of gain to an enterprise from a lawsuit for patent infringement against another enterprise. Historically patent infringement lawsuits are quite common in some industries such as Pharma, Technology, etc. In this case, the lawsuit for patent infringement by an enterprise is Contingent Asset for the Enterprise. However, it is a Contingent Liability for the Company at receiving the end of the lawsuit/responder to lawsuit.
Accounting Treatment for Contingent Asset (IFRS)
Accounting treatment of Contingent Assets, Contingent Liabilities, and Provisions are governed by International Accounting Standard 37 (IAS 37), which is a part of IFRS adopted by the International Accounting Standard Board.
According to IAS 37, Contingent assets are not recognized, but they are disclosed when it is more likely than not 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 positionStatement Of Financial PositionStatement of Financial Position represents the current financial status of an entity in terms of assets and liabilities. This statement is used by the stakeholders and shareholders as it affects their investing decisions. because that asset is no longer considered to be contingent.
|Probability of Occurrence||Accounting for Contingent Asset|
|Possible||Disclosure need in Notes|
|Remote||No Disclosure Required|
This article has been a guide to Contingent Assets and its meaning. Here we discuss how the accounting of Contingent Asset is done along with practical examples. You can also go through our other suggested articles –