Contingent Asset

What is a 'Contingent Asset'

A contingent asset is a potential economic benefit dependent solely on future events that can't be controlled by the company. Due to the uncertainty of the future events, these assets are not placed on the balance sheet. However, upon meeting certain conditions, contingent assets are reported in the financial statements in the accompanying notes.

BREAKING DOWN 'Contingent Asset'

A contingent asset is also known as a potential asset because there is the potential for future benefits to the company. Contingent assets may arise due to the economic value being unknown. In addition, they may arise due to uncertainty relating to the outcome of an event in which an asset may be created. A contingent asset occurs because of previous events, but the entirety of all asset information will not be collected until future events occur.

Examples of Contingent Assets

A company involved in a lawsuit with the expectation to receive compensation has a contingent asset, because the outcome of the case is not yet known and the dollar amount is yet to be determined. This is also the situation when expecting to receive money through the use of a warranty. Other examples include benefits to be received from an estate or other court settlement. Anticipated mergers and acquisitions are to be disclosed in the financial statements.

Generally Accepted Accounting Principles vs. International Financial Reporting Standards

Generally accepted accounting principles (GAAP) requires a note disclosure in the financial statements for any contingent assets. This is not the case for international reporting standards. A company does not need to report contingent assets, because they may never materialize. A company must reevaluate the potential asset continually to ensure the asset has not materialized. When a contingent asset becomes likely, the company must report the contingent asset in its financial statements by estimating the income to be collected. The estimate is generated using a range of possible outcomes, the associated risks and experience with similar potential contingent assets. Contingent asset accounting policies for GAAP are outlined in Financial Accounting Standard Number 5.

Conservatism Principle

Contingent assets are ruled under the conservatism principle, which states that uncertain events and outcomes should be reported in a manner that results in the lowest profit. In this case, the benefits of the asset are deferred to ensure that the financial statements are not misleading. Upon estimating the dollar amount to report using International Financial Reporting Standards, the lowest estimated asset valuation must be utilized under this principle. No gain may be recorded from a contingent asset until the gain actually occurs. The conservatism principle supersedes the matching principle; the asset may not be reported until a period after associated costs were incurred.