Contingent Assets

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Description of Contingent Assets. Explanation.

 

Contingent Assets

Definition Contingent Assets. Description


Contingent Assets are potential assets that arise from past events, and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events, which are not wholly within the control of the entity.


Example of a Contingent Asset

These assets are often simply rights to a future potential claim.

Another example might be a potential settlement from a lawsuit filed by Company A against Company B for infringement of Company As patent. If it is probable that Company A will win the lawsuit and receive an estimated amount of money, Company A has a contingent asset.


Accounting Treatment of Contingent Assets

In contrast to loss contingencies, gain contingencies are not recorded on the balance sheet until the event actually occurs and the obligation is confirmed.

Both under U.S. GAAP as well as under IAS/IFRS (IAS 37), contingent assets and gain contingencies should only be disclosed in the footnotes of the financial statements where an inflow of economic benefits is probable.

This differing treatment of loss contingencies and gain contingencies illustrates accounting conservatism, i.e. the notion that it is desirable to anticipate losses, but recognizing gains should wait until their confirmation and realization..

 

Contingent Assets Scope

IAS 37 excludes obligations and contingencies arising from:

  • Financial instruments that are in the scope of IAS 39
  • Non-onerous executory contracts
  • Insurance company policy liabilities (but IAS 37 does apply to non-policy-related liabilities of an insurance company)
  • Items covered by another IAS. For example,
    • IAS 11, Construction Contracts, applies to obligations arising under such contracts;
    • IAS 12, Income Taxes, applies to obligations for current or deferred income taxes;
    • IAS 17, Leases, applies to lease obligations; and
    • IAS 19, Employee Benefits, applies to pension and other employee benefit obligations.

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Compare with: Contingent Liabilities  |  Assets Held For Sale  |  Accrual Accounting

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