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Maneet Kaur

When, Where and How to disclose contingent asset?

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1 Answer

  1. This answer was edited.

    An entity should not recognize a contingent asset in the financial statements. It can only be disclosed considering the probability of the inflow of economic benefits associated with the contingent asset.

    A tabular representation of the question asked – When, Where & How to disclose Contingent Assets has been presented below.

    When, Where & How to disclose Contingent Assets

    Inflow of economic benefits (When)TreatmentRecognition/Disclosure (Where)Recognition/Disclosure (How)
    Virtually certain ( > 95% probability)Not treated as Contingent AssetRecognized as an “Asset” in the Balance SheetAsset will be recorded with the amount of inflow of economic benefits.
    Probable ( > 50% – 95% probability)Treated as Contingent AssetDisclosure is made in the-
    a. Financial Statements (Notes to Accounts); orb. Report of the approving authority (eg. Board of Directors),

    depending upon the requirement of local accounting standards.

    The entity shall give a brief description of the nature of the contingent assets at the end of the reporting period.

     

    If practicable, the entity shall also mention the estimate of the financial effect.

    Not Probable ( < 50% of probability)Not treated as Contingent AssetDisclosure not permitted

    Moving forward, let me also make you understand the disclosure with the help of an example.

    Example of Disclosure of Contingent Assets

    A fire broke out in the factory of ABC Jute Ltd destroying the entire jute worth 44,000,000. The jute destroyed was covered under an insurance policy. The policy prescribed acceptance of the amount of claim, amounting to 80% of the jute destroyed ie. 35,200,000 (80% * 44,000,000).

    Before the end of the financial year, ABC Jute Ltd received informal information from the insurance company that their claim has been processed and the payment has been dispatched for the claim amount.

    Suggest when, where & how to disclose this transaction in the financial statement.

    Solution-

    There is a possible asset (claim amount) & the inflow of economic benefits is also probable ( > 50% – 95% probability). Therefore, ABC Jute Ltd can treat and disclose this as a Contingent Asset. Disclosure shall be made in the Notes to Accounts or Report of Board of Directors, considering the requirements of the accounting standards.

    The following disclosure shall be made by ABC Jute Ltd as at the end of the reporting period:

    Notes to Accounts(Financial Statements)/Report of Board of Directors

    Contingent Asset

    ABC Jute Ltd has filed for the receipt of the insurance claim amount of 35,200,000 (44,000,000* 80%) to the insurance company, in respect of the jute destroyed.
    The inflow of economic benefits has been considered as probable because it has received informal information from the insurance company that their claim has been processed and the payment has been dispatched.

    Hope you got an insight into the disclosure requirements of Contingent Assets.

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