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To begin with, let me help you understand the meaning of the term Contingent Assets.
Meaning of Contingent Assets
Contingent Assets are possible assets or potential economic benefits because they do not currently exist but may arise in the near future. The shift from possible assets to real assets for the entity is dependent on the occurrence or non-occurrence of future events which are not under its control.
A tabular depiction of the recognition/disclosure principles for contingent assets has been presented below:
|The inflow of economic benefits||Treatment||Recognition/Disclosure|
|Virtually certain ( > 95% probability)||Not treated as Contingent Asset||Recognized as an “Asset” in the Balance Sheet|
|Probable ( > 50% – 95% probability)||Treated as a Contingent Asset||Disclosure is made in the-
a. Financial Statements (Notes to Accounts); orb. Report of the approving authority (eg. Board of Directors), as applicable.
|Not Probable ( < 50% of probability)||Not treated as Contingent Asset||Disclosure not permitted|
Examples of Contingent Assets
ABC Ltd filed a legal suit against its supplier XYZ Ltd for compensation against damages on non-supply of contracted goods. There is a possibility of ABC Ltd winning the case, as it has concrete evidence of contract violation by XYZ Ltd. The lawsuit has not been settled till the accounting year-end.
–In this case, it is probable ( > 50% – 95% probability) that there would be an inflow of economic benefits (compensation for damages) to ABC Ltd in the near future. So, it will be disclosed as a contingent asset in the notes to accounts or board reports (as applicable).
Suppose in the above example, the court orders XYZ Ltd to pay 100,000/- as compensation for damages. ABC Ltd has not yet received the money until the accounting year-end. Can it recognize this as a contingent asset?
–The court has ordered the payment for damages. Although ABC Ltd has not received the payment till the accounting year-end, it is virtually certain ( > 95% of probability) that it will receive the compensation amount in the near future.
ABC Ltd will now recognize the compensation amount as an asset in the financial statements and not disclose it as a contingent asset, as it is virtually certain.
Jute Ltd entered into a sale contract of 500,000 for the supply of jute during 20×2-20×3 with Textiles Ltd. During the transit, the truck carrying the jute for delivery met with an accident which destroyed the entire jute. The jute destroyed was covered under an insurance policy. The cost of the jute destroyed was 400,000. The policy prescribed acceptance of the amount of claim, amounting to 80% of the goods destroyed ie. 320,000 (80% * 400,000).
Before the end of the accounting year, Jute Ltd received informal information from the insurance company that their claim had been processed and the payment had been dispatched for the claim amount.
–In this scenario, there exists a possible asset (claim amount). Also, the inflow of economic benefits is probable ( > 50% – 95% probability) because Jute Ltd. has received informal information from the insurance company about the processing of the claim. Therefore, Jute Ltd can treat and disclose this as a contingent asset in the notes to accounts or board reports (as applicable).
A Road & Highway Developer enters into a contract with the Road & Highway Authority of India to complete a highway project. The agreed cost of the total project was 10 million, but the actual cost turned out to be 15 million. As per the terms of the contract, the Authority was mandatorily required to hand over the land within a specific time period. But the Authority failed to do so. On account of the delay in handing over of land, an excess cost of 5 million was incurred by the Developer.
To recover the incremental cost incurred, the Developer filed litigation against the Authority for reimbursement of 5 million. The court has not yet given its final verdict. However, the Developer is sure that he will win the case.
In this example, the Developer will disclose 5 million as a contingent asset in the notes to accounts or board report (as applicable) till the court does not give its final verdict. This is because there is a probability of the Developer winning the case as there has been a violation of terms by the Authority.
Once the litigation is announced in favour of the Developer by the court, this will be recognized as an asset in the balance sheet of the Developer.
Hope these examples have made your understanding of contingent assets very clear.
>Related Long Quiz for Practice Quiz 18 – Contingent Assets