CONTINGENT ASSETS AND CONTINGENT
LIABILITIES
CONTINGENT ASSETS
 Possible assets arise from past events.
 Their existence will be confirmed only after
occurrence or non-occurrence of some
events.
 The events are uncertain and not within the
control of enterprise.
 It usually arises from unplanned or
unexpected events that give rise to
possibility of an inflow of economic
benefits.
 For example a claim lodged against a party
through legal process and verdict of which
is still awaited.
 Where outcome is uncertain, is a contingent
asset.
EXAMPLES
 No recognition in Financial Statements -
Prudence / Conservative Principle.
 No disclosure of Contingent Assets in
Financial Statements.
 Usually disclosed in report of approving
EXAMPLES
authority, if inflow of economic benefit is
probable.
 When realization is virtually certain, and
then no longer remains as Contingent Asset.
 Assets and incomes are recognized in
Financial Statements in the year which the
change occurs.
 Usually arises from unplanned or
unexpected events.
CONTINGENT LIABILITIES
 Possible obligation arises from past
events, existence of which will be
confirmed only by occurrence or non-
occurrence of one or more uncertain
future event not within the control of
enterprise; or
 Present obligation that arises from past
events but is not recognized because:
1. It is not probable that an outflow
will be required to settle the
obligation.
2. A reliable estimate of the amount
of obligation cannot be made.
 No recognition of contingent liability.
 Disclosure by way of a note to the balance
sheet.
 When recognized: if it becomes probable,
a provision is recognized in Financial
Statements of the period in which change
probably occurs except in the extremely
circumstances where no reliable estimate
can be made.
 Claims against the company not
acknowledged as debts
 Bills discounted but not yet matured
 Arrears of dividends on cumulative
preference shares
 Guarantee given in respect of third parties
 Statutory liability under dispute
 Uncalled liability on investments in partly
paid shares
 Estimated amount of contracts remaining to
be executed on capital account and not
provided for
DISTINCTION BETWEEN CONTINGENT LIABILITY CONDITIONS FOR RECOGNITION OF PROVISION
AND OTHER LIABILITY
When
BASIS OF CONTINGENT OTHER
DINSTINCTION LIABILITY LIABILITY  Present obligation as a result of past
Meaning May or may Present event.
not arise obligation  It is probable that outflow of resources
Depends on arising from will be required to settle the obligation.
uncertain past event  A reliable estimate can be made in terms
event
of amount of the obligation.
Dependence Uncertain Already
of occurrence future events occurred DISTINCTION BETWEEN PROVISION AND
Certainty of No certain Certain CONTINGENT LIABILITY
outflow of
resources BASIS OF CONTINGENT PROVINSION
Recognition Not Recognized in DINSTINCTION LIABILITY
recognized in financial Meaning Possible Present liability
financial statements obligation of uncertain
statements which may or amount.
Disclosure By way of a Liabilities side may not arise Can be
foot note to Of Balance measured
Balance Sheet Sheet reliably
Examples Bills Creditors for Recognition Fails to meet Meets this
discounted but goods criteria this criteria criteria
not matured supplied Conditions for Includes Present
Arrears of Outstanding recognition present obligations that
dividend expenses obligations that meet
don't meet recognition
recognition criteria.
PROVISION criteria. Probable
Probable outflow and
Meaning outflow or reliable
amount cannot estimate be
As per schedule VI be reliably made.
estimated.
Amount written off or retained by way of
providing for depreciation, renewal or diminution Judgment of If management If management
in the value of assets or retained by way of management estimates less estimates
providing for any known liability, of which the likely outflow, probable
it discloses outflow, it
amount cannot be determined with substantial
obligation as a recognizes a
accuracy. contingent provision in
liability Balance Sheet
As per AS 29

A provision is a liability which can be measured

only by using a substantial degree of estimation.
EXAMPLE TO UNDERSTAND PROVISION AND
CONTINGENT LIABILITY

 The value added tax officer imposes a

penalty for violation of a provision in the
value added tax act.
 The company files an appeal.
 If management estimates that it is
probable that company will have to pay
the penalty, it recognizes a provision for
the liability.
 On the other hand, if management
anticipates that the judgment of appellate
authority will be in its favor and it is less
likely that company will have to pay
penalty, it will disclose the obligation as a
contingent liability instead of recognizing
a provision for the same.

NATURE OF PRESENT POSSIBLE

OBLIGATION / OBLIGATION OBLIGATION
SITUATION
Probable Recognise as Disclose as a
outflow and Provision Contingent
reliable Liability
estimate

Probable Disclose as a Disclose as a

outflow and Contingent Contingent
no reliable Liability Liability
estimate

No probable Disclose as a Do nothing

outflow / Contingent
liability and no Liability
reliable
estimate
1. Contingent Asset usually arises from Unplanned
or Unexpected Events that give rise to -
A. The possibility of an inflow of economic
benefits to the business entity
B. The possibility of an outflow of economic
benefits to the business entry
C. Either A or B
D. None of the above
2. Contingent Liability usually arises from Unplanned
or Unexpected Events that give rise to -
A. The possibility of an inflow of economic
benefits to the business entity
B. The possibility of an outflow of economic
benefits to the business entity
C. Either A or B
D. None of the above
3. If an inflow of economic benefits is probable then
a Contingent Asset is disclosed -
A. In the financial statements
B. In the report of the approving authority
(Board of Directors in the case of a
company, and the corresponding
approving authority in the case of any
other enterprises)
C. In the cash flow statement
D. None of the above
4. Present Liability of Uncertain Amount, which can
be measured reliably by using a substantial
degree of estimation is termed as
A. Liability
B. Provision
C. Contingent Liability
D. Contingent Asset
5. In the case of a ____, either outflow of resources
to settle the obligation is not probable or the
amount expected to be paid to settle the liability
cannot be measure with sufficient reliability.
A. Liability
B. Provision
C. Contingent Liabilities
D. Contingent Asset
6. In the Financial Statements, Contingent Liability is
A. Recognized
B. Not recognized
C. Adjusted
D. None of the above
7. In the Financial Statements, Contingent Liability is
A. Recognized
B. Not Recognized
C. Adjusted
D. None of the above
8. In the Financial Statements, Provision is
A. Recognized
B. Not recognized
C. Adjusted
D. None of the above
9. If a reliable estimate of probable outflow of
resources to settle a present obligation can be
made, it is
A. To be recognized as a liability
B. To be recognized as a provision
C. To be disclosed as a contingent liability
D. None of the above
10. If a reliable estimate of probable outflow of
resources to settle a present obligation cannot be
made, it is
A. To be recognized as a liability
B. To be recognized as a provision
C. To be disclosed as a contingent liability
D. None of the above
11. If a reliable estimate of probable outflow of
resources to settle a possible obligation cannot be
made, it is
A. To be recognized as a liability
B. To be recognized as a provision
C. To be disclosed as a contingent liability
D. None of the above
12. If the likelihood of an outflow of resources to
settle a possible obligation is remote, it is
A. To be recognized as a liability
B. To be recognized as a provision
C. To be disclosed as a contingent liability
D. None of the above
13. When an enterprise is jointly and severally liable
for an obligation, the part of the obligation that is
expected to be met by other parties is treated as
A. Provision
B. Contingent asset
C. Contingent liability
D. Liability
14. Which of the following is not a Contingent
Liability?
A. Claims against the company not
acknowledged as debts
B. Debts included on debtors which are
doubtful in nature
C. Uncalled liability on partly paid shares
D. Arrears of cumulative
15. What is the treatment as per AS-29 when
dividend is proposed or declared after balance
sheet date?
A. Adjustment in the next financial year
B. No adjustment is required
C. Adjustment in the current financial year
D. Just to disclose the fact
16. Provisions for contingencies are not made in
respect of ___________ since they do not relate
to situation existing at the balance sheet date.
A. Specified business risk
B. Unspecified business risk
C. Uncertain business risk
D. Certain business risk
17. Contingent Liability is shown due to
A. Convention of full disclosure
B. Convention of conservation
C. Dual aspect concept
D. Convention of materiality
18. _______ is used for items whose 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
enterprise.
A. Contingent
B. Contingent asset
C. Contingent liability
D. Provision
19. Contingent Asset is not recognized in the financial
statements on the basis of the accounting
concept,
A. Materiality
B. Prudence
C. Substance over form
D. None of the above
20. A _______ is recognized in the financial statement
of the period in which the change is probability
occurs.
A. Provision
B. Contingent asset
C. Contingent liability
D. Liability