Financial Accounting Concepts

What are Contingent Assets and Contingent Liabilities?

Contingent Assets

Contingent assets are those in which the likelihood of economic profit depends completely on future occurrences that cannot be controlled by the company. These assets are not included in the balance sheet due to the unpredictability of future events. However, they are presented in the financial statement notes of the company. Typically, these assets represent rights to a prospective future claim based on previous occurrences.

Contingent assets are typically the result of unplanned or other unforeseen events that may result in a financial windfall for the firm.

How to Report Contingent Assets in Financial Statements?

In financial statements, contingent assets are not reported since doing so could result in the recording of income that may never be realised. Typically, it is included in the report of the approving authority when economic benefits are anticipated. When the realisation of revenue is practically certain, however, the corresponding asset is not a contingent asset and its recognition is legitimate.

Contingent Liabilities

The term “contingent liability” is defined as “an obligation to pay a sum of money, the payment of which depends on the occurrence of some future event.”

In other words, a contingent liability is a potential obligation to pay certain sums contingent on future circumstances. Contingent liabilities are obligations that an entity may or may not incur based on the outcome of a future event.

A corporation has specified duties that must be met, but the likelihood of payment is limited. The nature and extent of contingent liabilities are described in the balance sheet footnote.

These liabilities are only documented in a company’s books and reflected on its balance sheet if they are both likely and reasonably determinable.

Examples of contingent liabilities include pending litigation, bank guarantees, etc. Suppose a former employee issues a claim against a corporation for $500,000 for discrimination. If the company is found guilty, it will have a liability. Nonetheless, if the firm is found not guilty, it will have no actual liability. This type of obligation is known as contingent liability.

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