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Hi Mike,
My query is to do with the accounting treatment of Contingent Asset.
As i understand, a contingent asset is a possible asset and the inflow of economic benefits is either probable or possible.
When i read the Conceptual Framework, i am told that an element (like an asset) is recognised in the financial statements when “it is probable that an any future economic benefit will flow to the entity” (in the case of an asset) and “the item has a cost or value that can be measured with reliability”
So, if say the reporting entity expects to probably receive damages of €100,000, even though the inflow is probable, the asset is not recognised because, until the court decides in favour of the client, the asset (i.e. the expected damages) cant be measured with reliability….and also until the court finds in favour of the client, the asset does not exist…i.e. it is only a possible asset …. is this the correct interpretation of why a contingent asset where the inflow of Economic Benefits is probable , is not accounted for (and is only disclosed)
Thanks
Liam“a contingent asset is a possible asset ” – No, it’s a probable asset
For a probable asset that is still not certain to be recognised, it must satisfy the requirement of “virtual certainty” – as accountants we err on the side of caution
In contrast, for a liability that is not yet certain, it requires only probability for it to be recognised – that is, the chance of it crystallising should be greater than the chance of it not crystallising
Does that answer you?
Hello, can you please tell me if the contingent asset is probable, will it be disclosed in the notes of the account or will it not at all be recorded anywhere?
Where the probability of an asset crystallising is virtually certain, then the asset will be recognised as an asset
Where the probability of crystallisation is greater than 50% but has not yet achieved virtual certainty, the matter will be disclosed as a note to the financial statements
Where probability of crystallisation is 50% or less, no mention is made of the asset in the notes to the financial statements
OK?
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