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International Accounting Standard 37Provisions, Contingent Liabilities and Contingent Assets

what is contingent assets

Several financial statements tend to follow certain accounting concepts and principles. However, there are some cases where relevant and important information is not present in some of the statements and that is due to some of these accounting principles and concepts. Here in the notes about contingent assets, we are going to figure out some of the details that students need to know about in the chapter. Unlike contingent assets, they refer to a potential loss that may be incurred, depending on how a certain future event unfolds.

Nonetheless, the Committee observed that entities do not have an accounting policy choice between applying IAS 12 and applying IAS 37   Provisions, Contingent Liabilities and Contingent Assets to interest and penalties. Instead, if an entity considers a particular amount sample business budget template for income and expenses payable or receivable for interest and penalties to be an income tax, then the entity applies IAS 12 to that amount. If an entity does not apply IAS 12 to a particular amount payable or receivable for interest and penalties, it applies IAS 37 to that amount.

what is contingent assets

The Committee observed that if the tax deposit gives rise to an asset, that asset may not be clearly within the scope of any IFRS Standard. Furthermore, the Committee concluded that no IFRS Standard deals with issues similar or related to the issue that arises in assessing whether the right arising from the tax deposit meets the definition of an asset. The Committee concluded that the right arising from the tax deposit meets either of those definitions. The tax deposit gives the entity a right to obtain future economic benefits, either by receiving a cash refund or by using the payment to settle the tax liability.

Application of the recognition and measurement rules

Once, this has been made certain that there will be a rise of economic benefits, these contingent assets can easily be included in all the different financial statements which are made. Both generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) require companies to disclose contingent assets if there is a decent possibility that these potential gains will eventually be realized. IFRS, on the other hand, is slightly more lenient and generally permits companies to make reference to potential gains if there is at least a 50% likelihood that they will occur. Contingent liabilities aren’t recognised in the primary financial statements but should be disclosed in the notes. However, if the risk of a resource outflow is remote, then such liabilities shouldn’t be disclosed.

If the likelihood of resource inflow exceeds 50%, contingent assets are disclosed in the notes to financial statements (as per IAS 37.89) but aren’t recognised in the primary financial statements. If it becomes ‘virtually certain’ (roughly 90-95%, not explicitly defined in IAS 37) that resources will flow in, then the asset is recognised in the statement of financial position and profit or loss. In extremely rare cases, disclosure of some or all of the information required by paragraphs 84⁠–⁠89 can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, an entity need not disclose the information, but shall disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.

If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which the change occurs. If an inflow of economic benefits has become probable, an entity discloses the contingent asset (see paragraph 89). In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within this Standard the term ‘contingent’ is used for liabilities and assets that are not recognised because their existence will be confirmed only by the occurrence or non‑occurrence of one or more uncertain future events not wholly within the control of the entity. In addition, the term ‘contingent liability’ is used for liabilities that do not meet the recognition criteria.

Accounting for a Contingent Asset

Financial statements deal with the financial position of an entity at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to operate in the future. The only liabilities recognised in an entity’s statement of financial position are those that exist at the end of the reporting period. Thus, it may be appropriate to treat as a single class of provision amounts relating to warranties of different products, but it would not be appropriate to treat as a single class amounts relating to normal warranties and amounts that are subject to legal proceedings. Even when an entity has taken a decision to sell an operation and announced that decision publicly, it cannot be committed to the sale until a purchaser has been identified and there is a binding sale agreement.

If major defects were detected in all products sold, repair costs of 4 million would result. The entity’s past experience and future expectations indicate that, for the coming year, 75 per cent of the goods sold will have no defects, 20 per cent of the goods sold will have minor defects and 5 per cent of the goods sold will have major defects. In accordance with paragraph 24, an entity assesses the probability of an outflow for the warranty obligations as a whole.

Paragraphs 72⁠–⁠83 set out how the general recognition criteria apply to restructurings. Gains on the expected disposal of assets are not taken into account in measuring a provision, even if the expected disposal is closely linked to the event giving rise to the provision. Instead, an entity recognises gains on expected disposals of assets at the time specified by the Standard dealing with the assets concerned. In 2012, the IASB added to its agenda a research project on the accounting for emissions trading schemes.

On the basis of its analysis, the Committee concluded that a project on interest and penalties would not result in an improvement in financial reporting that would be sufficient to outweigh the costs. Consequently, the Committee decided not to add a project on interest and penalties to its standard-setting agenda. Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent. In some countries, the ultimate authority is vested in a board whose membership includes representatives of interests other than those of management (eg employees) or notification to such representatives may be necessary before the board decision is taken. Because a decision by such a board involves communication to these representatives, it may result in a constructive obligation to restructure. In some cases, the entity will not be liable for the costs in question if the third party fails to pay.

Provisions are measured at the best estimate (including risks and uncertainties) of the expenditure required to settle the present obligation, and reflects the present value of expenditures required to settle the obligation where the time value of money is material. A noteworthy agenda decision revolves around the accounting treatment of a deposit made to tax authorities. In the scenario discussed by the IFRS Interpretations Committee, an entity, confident about winning a dispute with tax authorities, pays the disputed amount as a deposit to avert penalties if it loses. Upon resolution, the deposit will either be refunded to the entity (if it wins) or offset against the obligation (if it loses).

  1. Contingent assets also crop up when companies expect to receive money through the use of a warranty.
  2. For a plan to be sufficient to give rise to a constructive obligation when communicated to those affected by it, its implementation needs to be planned to begin as soon as possible and to be completed in a timeframe that makes significant changes to the plan unlikely.
  3. IFRS Sustainability Standards are developed to enhance investor-company dialogue so that investors receive decision-useful, globally comparable sustainability-related disclosures that meet their information needs.
  4. Disclosure of the uncertainties surrounding the amount of the expenditure is made under paragraph 85(b).
  5. The IFRS Foundation is a not-for-profit, public interest organisation established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards.

An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Contingent assets are ruled under the conservatism principle, which is an accounting practice that states that uncertain events and outcomes should be reported in a manner that results in the lowest potential profit. In other words, companies are discouraged from inflating expectations and are generally advised to utilize the lowest estimated asset valuation.

Disclosure of a Contingent Asset

Doing so at least reveals the presence of a possible asset to the readers of the financial statements. Contingent liabilities are subject to continuous reassessment due to the possibility of their development differing from initial expectations. This ongoing evaluation is crucial to ascertain whether a probable outflow of resources has become probable. When an outflow of future economic benefits for an item, previously classified as a contingent liability, becomes probable, it necessitates the recognition of a provision in the period during which this change in probability is identified (IAS 37.30). 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).

The Interpretations Committee received a request to clarify the measurement of a liability under IAS 37 that arises from an obligation to deliver allowances in an emission trading scheme. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted as drafted. For the purpose of this Standard, such an obligation is treated as a legal obligation. Differences in circumstances surrounding enactment make it impossible to specify a single event that would make the enactment of a law virtually certain.