What is a Contingent Asset?

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.read more, unlike contingent liability, which is disclosed in a financial statement by taking notes to account.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 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.read more.

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 the control of the Company/Enterprise. Contingent Liability is reported in the company’s annual report by 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.

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Example of Contingent Asset

Example #1

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 the Developer and Authority, land acquisition for the project was supposed to be carried out by the Authority and handed over to the Developer in a definite time frame. Since the Authority could not hand over the required land to the Developer for the development of the Project as per schedules in the contract leading to an increase in overall project cost, the Developer filed litigation against the Authority for reimbursement of incremental cost incurred by the Developer.

Below is the table for demonstration purpose-

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.read more 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 costThe Incremental CostIncremental costs are the additional costs associated with the production of one additional unit, and it only considers costs that are likely to change as a result of a specific decision, such as replacing machinery or equipment or adding a new product, and so on.read more 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.read more 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 Developer’s Balance Sheet.

Example #2

The possibility of Gaining from a Lawsuit Against a Company for Patent Infringement

source: money.cnn.com

Another example is the possibility of gain to an enterprise from a lawsuit for patent infringement against another enterprise. In this case, an enterprise’s lawsuit for patent infringement is Contingent Asset for the Enterprise. However, it is a Contingent Liability for the Company at receiving the end of the lawsuit/responder to the lawsuit. Historically patent infringement lawsuits are quite common in some industries such as Pharma, Technology, etc.

Accounting Treatment for Contingent Asset (IFRS)

Accounting treatment of Contingent Assets, Contingent Liabilities, and Provisions is governed by International Accounting Standard 37 (IAS 37), 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 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.read more because that asset is no longer considered to be contingent.

This article has been a guide to Contingent Assets and their 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 –

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