Contingent asset definition
/What is a Contingent Asset?
A contingent asset is a possible asset that may arise because of a gain that is contingent on future events that are not under an entity's control. Auditors are particularly watchful for contingent assets that have been recorded in a company's accounting records, and will insist that they be eliminated from the records before issuing an auditor’s opinion on its financial statements.
Accounting for a Contingent Asset
According to the accounting standards, a business does not recognize a contingent asset even if the associated contingent gain is probable. A contingent asset becomes a realized (and therefore recordable) asset when the realization of income associated with it is virtually certain. In this case, recognize the asset in the period when the change occurs.
Contingent Assets vs. Contingent Liabilities
The treatment of a contingent asset is not consistent with the treatment of a contingent liability, which should be recorded when it is probable (thereby preserving the conservative nature of the financial statements). This means that contingent liabilities are more likely to be recorded than contingent assets.
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Example of a Contingent Asset
The best example of both sides of a contingent asset and contingent liability is a lawsuit. Even if it is probable that the plaintiff will win the case and receive a monetary award, it cannot recognize the contingent asset until such time as the lawsuit has been settled. Conversely, the other party that is probably going to lose the lawsuit must record a provision for the contingent liability as soon as the loss becomes probable, and should not wait until the lawsuit has been settled to do so. Thus, recognition of the contingent liability comes before recognition of the contingent asset.
Disclosure of a Contingent Asset
A business may disclose the existence of a contingent asset in the notes accompanying the financial statements when the inflow of economic benefits is probable. Doing so at least reveals the presence of a possible asset to the readers of the financial statements.