Contingent Assets
The word contingent or contingency means “possible, but not certain to occur”. Contingent assets are those assets which may or may not become a reality for a business depending on the outcome of a future event. The existence of this kind of asset is completely dependent on the occurrence of a probable event in future. It is a potential asset but there is no surety.
An example of such an asset is a court case. Only if the company wins the court case & gains from it, the contingent asset will actually be realized.
A contingent asset may be disclosed as a footnote to the balance sheet, These are not recognized in financial statements since this may result in recognition of income that may never be realized. Unlike contingent liabilities, contingent assets are not recorded even if they are probable and the amount of gain can be estimated.
The only exception to recording a contingent asset is where an inflow of economic benefits is sure or in other words virtually certain such as a settled lawsuit (where the benefit is sure to be received) may be disclosed & recorded in the period when the change actually occurs.
Example
Let us suppose that Unreal Pvt Ltd. files a case of patent violation on Real Pvt. Ltd. Now, the former can’t recognize this as a contingent asset even if it is sure to win and the amount can be estimated. Only when the lawsuit is settled and a sure amount is to be received at a specific time can this be recognized in the books of Unreal Pvt Ltd. as a Contingent Asset.
Short Quiz for Self-Evaluation
>Related Long Quiz for Practice Quiz 18 – Contingent Assets
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