Asok Nadhnani-Accountancy-Contingent Assets and Liabilities

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	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.
Measurement	A liability can be accurately measured.	A contingent liability cannot be accurately measured.
Disclosure in Balance Sheet	It is a part of Balance Sheet.	It should be disclosed as a footnote at the bottom of the Balance Sheet.

11.5 Difference between Provision and Contingent Liability

Basis	Provision	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.
Disclosure	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.