CONTINGENT ASSETS AND CONTINGENT LIABILITIES – CA Foundation, CPT notes, PDF
This article is about contingent assets and contingent liabilities for CA foundation CPT students. we also provide pdf file at the end.
4.1 CONTINGENT ASSETS Definition, meaning, example :
♦ A contingent asset is a 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.
♦ A contingent asset example is a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain.
♦ An enterprise should not recognize a contingent asset.
♦ However, when the realization of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
♦ A contingent asset is not disclosed in the financial statements.
♦ It is usually disclosed in the report of the approving authority (Board of Directors in the case of a company, and, the corresponding approving authority in the case of any other enterprise), where an inflow of economic benefits is probable.
Review at every balance sheet date
♦ Contingent liabilities are assessed continually and if it has become probable that an outflow of economic benefits will arise, the liability and the related expense are recognized in the financial statements of the period in which the change occurs.
♦ Similarly, contingent assets are assessed continually and if it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognized in the financial statements of the period in which the change occurs.
(a) A liability is a present obligation of the enterprise.
(b) An obligation is a duty or responsibility to act or perform in a certain way.
(c) Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement.
(d) Obligations also arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner.
4.3 CONTINGENT LIABILITY:
(a) 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.
Possible obligation – An obligation is a possible obligation if, based on the evidence available. its existence at the balance sheet date is considered not probable, or
(b) A contingent liability is 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.
It is said to be ‘probable’ if chances of its happening are more than not happening i.e. probability is more than half.
4.4 ACCOUNTING OF CONTINGENT LIABILITIES:
♦ An enterprise should not recognize a contingent liability i.e. an enterprise should not make provision for a contingent liability.
♦ It should only disclose contingent liability in the notes to accounts.
♦ If the possibility of an outflow of resources embodying economic benefits is remote then even disclosure is not required.
Example: Suppose customers are demanding compensation for defects in goods and have filled case in the court against the entity. In the opinion of Advocates, the chances of losing the case i.e. claim against entity will arise are:
(1) Probable: i.e. chances of losing is more than of winning hence make provision for the loss and treat it as a liability.
(2) Possible: i.e. chances of losing is less than 50% hence make no provision for the loss and disclose it as a contingent liability.
(3) Remote: i.e. chances of losing is very less hence neither provision for the loss nor disclosure as contingent liability is required.