Contingent
Assets and Liabilities
By Asok Nadhani
11.1 Contingent
According
to AS-4, the term contingent is used for those items whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events, not wholly within the control of the enterprise. For example, a
tax liability under legal dispute pending in a court or law.
11.2 Contingent Asset
As per AS-29, Contingent asset is possible asset
that 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 enterprise. For example,
claim for damages with insurance company.
11.2.1
Recognition of Contingent Asset
An enterprise should not recognize a
contingent asset since this may result in the recognition of income that may
not be realized. However, when the realization of income is virtually certain,
then the
related asset is not a contingent asset and its recognition is appropriate.
11.2.2
Disclosure
A contingent asset is not disclosed in the
financial statement. Contingent asset may be disclosed in the report of the
approving authority (e.g. Board of Directors in case of a company) only when an
inflow of income is probable.
11.3 Contingent Liability
As per AS-29, a
Contingent Liability is:-
a
A possible obligation that arises from past events
and 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 enterprise; or
b
A present obligation that arises from past events
but is not recognized because:
i
It is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation; or
ii
A reliable estimate of the amount of the obligation
cannot be made.
So to say, Contingent
liability also arises from unexpected or unplanned activity, which gives rise
to the possibility of an outflow of resources embodying economic benefits. For
example, possible fines and penalties payable to government.
11.3.1 Recognition of Contingent Liability
An enterprise should not recognize contingent
liability, but it should be disclosed.
11.3.2 Disclosure
If there is a possibility
of an outflow of resources resulting economic benefits is probable, an
enterprise should disclose for each class of contingent liability at the
balance sheet date giving a brief description of the nature of the contingent
liability, as a footnote at the bottom of the Balance Sheet.
11.4 Difference between
Liability and Contingent Liability
|
Basis
|
Liability
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Contingent Liability
|
|
Definition
|
A liability is a present obligation which arises
from past events.
|
A contingent liability is a past obligation which
arises from past event.
|
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Measurement
|
A liability can be accurately measured.
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A contingent liability cannot be accurately measured.
|
|
Disclosure in Balance Sheet
|
It is a part of Balance Sheet.
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It should be disclosed as
a footnote at the bottom of the Balance Sheet.
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11.5 Difference between
Provision and Contingent Liability
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Basis
|
Provision
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Contingent Liability
|
|
Meaning
|
A provision is a liability which can be measured with
substantial degree of estimation.
|
Contingent liability is
not a liability because, a reliable estimate of the amount of the obligation
cannot be made.
|
|
Recognition
|
It is recognized in Balance Sheet.
|
An enterprise should not recognize contingent
liability.
|
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Disclosure
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1. For each class
of provision, an enterprise should disclose:-
(a) The carrying
amount at the beginning and end of the period;
(b) Additional
provisions made in the period, including increases to existing provisions;
(c) Amounts used
(i.e. incurred and charged against the provision) during the period.
(d) Unused amounts
reversed during the period.
|
A contingent liability is disclosed, unless the
possibility of an outflow of resources resulting economic benefits is
probable.
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