A Contingent Asset is a potential asset that may only be REALIZED if a certain condition is met. i.e, it is an asset that only has VALUE if a specific event occurs. This event can be internal to a company or external, such as changes in market conditions.
Table of Contents
These are commonly found in financial statements and are used to reflect the UNCERTAINTY of an asset’s future value.
1. Accounting (As Per IAS 37)
Contingent Assets as per IAS 37 are typically NOT recorded on a company’s balance sheet until the event that would trigger the realization of the asset occurs. This is because the value of a contingent asset is uncertain and may never be realized.
However, companies are required to DISCLOSE them in their financial statements, usually in the notes to the financial statements. This disclosure provides investors and other stakeholders with information about the ‘Potential Assets’ that a company may have, and the risks associated with those assets.
Contingent Asset Examples
They can come in many forms, INCLUDING lawsuits, patents, and contracts.
For example, a company may have a LAWSUIT pending that could result in a large settlement. The POTENTIAL VALUE of this lawsuit would be considered a contingent asset until the outcome of the lawsuit is determined. If the lawsuit is settled in favor of the company, the value of the settlement would become a realized asset. If the lawsuit is lost, the value of the settlement would be considered a realized liability.
Similarly, a company may have a PATENT pending that could potentially generate SIGNIFICANT revenue if it is approved. The potential value of this patent would be considered a contingent asset until the patent is approved and the company is able to start generating revenue from it.
In the case of CONTRACTS, a contingent asset could be the potential future revenue from a signed contract. The value of this asset would only be REALIZED if the contract is fulfilled and the company receives payment. If the contract is not fulfilled or the payment is not received, the potential value of the asset would NOT be realized.
It is IMPORTANT to note that while contingent assets can potentially increase a company’s value, they also come with risks. For example, the outcome of a lawsuit may not be in a company’s favor, the patent may not be approved, or the contract may not be fulfilled. These potential losses must be CONSIDERED when evaluating a company’s financial position and future performance.
The Bottom Line
Contingent Asset is a type of POTENTIAL asset that may only be realized if a specific event occurs. i.e. lawsuits, patents, and contracts, and their value is uncertain until the triggering event occurs. While contingent assets can potentially increase a company’s value, they also come with risks and should be evaluated carefully when considering a company’s financial position and future performance.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)