A contingent asset is a possible asset arising from past events and that will be confirmed only by future events not under an entity's control. The concept is used as the basis for disclosures regarding this type of asset in the notes accompanying the financial statements of an organization. The disclosure rules related to contingent assets are as follows:
- Do not recognize a contingent asset; only disclose it in the footnotes when an incoming payment is probable.
- If the realization of income is virtually certain, then the related asset is no longer a contingent asset, and it can be recognized in the period when thechange occurs.
As an example of a contingent asset, a business believes that it will win a lawsuit against a competitor for a patent violation, and discloses the situation in its financial statement footnotes. A year later, the company receives a settlement of $1,000,000. The asset is no longer contingent, since cash has been received, so the award is recognized in the income statement and balance sheet.
Contingent assets should be regularly assessed to ensure that they are properly disclosed in the financial statements