Contingent Asset & Contingent Liability
The term contingent means circumstantial, incidental, conditional, etc, meaning something not sure to happen. 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. claim for damages with insurance company., etc
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.
Contingent Asset may arise due to unexpected events that give rise to possible economic benefits. For example, A legal claim initiated by the Company for damages from a Party.
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.
Disclosure of Contingent Asset : A contingent asset is not disclosed in the financial statement. Contingent asset may be disclosed in the report of approving authority (e.g. Board of Directors in case of a company) only when an inflow of income is probable.
As per AS-29, a Contingent Liability is a possible obligation that arises from past events to be confirmed on result of uncertain events, not in control of the enterprise.
A Contingent Liability is 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
A Contingent Liability may be a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or 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.
Recognition of Contingent Liability : An enterprise should not recognize contingent liability, but it should be disclosed.
Disclosure of Contingent Liability : 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.
Liability vs Contingent Liability
The distinction between Liability & Contingent Liability is made by the management. A Liability is present financial obligation arising from past events. The settlement of liability results in outflow of resources. On the other hand, in case of Contingent Liability, the outflow of resources to settle the Contingent Liability may not be probable, or may not accurately be estimated.
Examples of Contingent Liability : Claims against Company not acknowledged as Debt. Guarantees given to third parties, Statutory Liabilities under dispute, etc.
|Definition||A liability is a present obligation which arises from past events.||Contingent liability is a past obligation which arises from past event.|
|Measurement||A liability can be accurately measured.||Contingent liability cannot be accurately measured.|
|Disclosure||Liability is a part of Balance Sheet.||Contingent liability should be disclosed as footnote at the bottom of the Balance Sheet.|
Provision vs Contingent Liability
Provision means any amount provided for depreciation, depletion, renewal of Asset, or amount retained in respect of any known liability, the amount of which could not be accurately ascertained.
For example, Tax authorities imposes a penalty on the company, which is contested by the Company in a court of law. The company after going into the facts, thinks that it is quite likely that the Company would have to pay the penalty, but cannot accurately quantify it, it will make a provision. On the other hand, if the Company thinks that the case may go in their favour, it will disclose the contingent liability, without making any provision for it.
|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||Provision is recognised in Balance Sheet.||Contingent liability should not be recognized in Balance Sheet.|
|Disclosure||For each class of provision, the specified details should be disclosed||A contingent liability is disclosed, unless the possibility of an outflow of resources resulting economic benefits is probable.|
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