Contingent assets

Learning objectives

• Identify a contingent asset and its treatments: never recognised, disclosed when the inflow is probable, recognised as an asset when the inflow becomes virtually certain.L1, L2
• Recognise an asset and the related income in the period in which the inflow becomes virtually certain.L2, L3
• Distinguish the asymmetric thresholds applicable to liabilities (probable) and to assets (virtually certain).L1, L2, L3

Normative references

• IAS 37 §31An entity does not recognise a contingent asset.
• IAS 37 §32Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits, for example a claim being pursued through legal processes where the outcome is uncertain.
• IAS 37 §33Contingent assets are not recognised because this may result in the recognition of income that may never be realised; when the realisation of income is virtually certain, the related asset is not a contingent asset and its recognition is appropriate.
• IAS 37 §34A contingent asset is disclosed (para. 89) where an inflow of economic benefits is probable.
• IAS 37Contingent assets are assessed continually: if an inflow becomes virtually certain, the asset and the related income are recognised in the period in which the change occurs; if it becomes probable, the contingent asset is disclosed.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

14 questions

• An entity does not recognise a contingent asset.L1
• Zéphane has sued a supplier; its lawyers consider it probable, but not virtually certain, that compensation will be obtained. Which treatment applies?L1
• By symmetry with provisions, a contingent asset is recognised as soon as an inflow of economic benefits is probable.L1
• From what degree of probability does an inflow of economic benefits related to a contingent asset lead to recognising an asset?L1
• Lorcane is training its accountants on the treatment of claims it brings against third parties. Which of these propositions should be retained?L2
• Since 20X3, Delmara has been suing a former competitor for compensation; until now, the asset was only disclosed in the notes. On 15 November 20X5, a final decision, with no possible appeal, orders the competitor, which is fully solvent, to pay {awarded_amount}, payable in February 20X6. Record the entry at 31 December 20X5.L2
• Escaline was claiming compensation from an installer for a defect that had stopped a production line; the outcome was uncertain. On 10 December 20X5, the parties sign an irrevocable settlement: the installer, whose solvency is not in doubt, will pay {settlement_amount} on 15 January 20X6. Record the entry at 31 December 20X5.L3
• Fiorane has filed a claim against a former distributor for breach of an exclusivity clause. At the reporting date, its lawyers consider it probable that it will obtain compensation, but the hearing has not taken place and the amount is still disputed. What does Fiorane do?L2
• On 5 December 20X5, a court of first instance orders a supplier to pay 310,000 to Gorvald. The supplier appealed on 20 December and Gorvald's lawyers consider the outcome of the appeal favourable but not assured. What does Gorvald recognise at 31 December 20X5?L3
• Why does IAS 37 prohibit recognising a contingent asset?L2
• When an inflow of economic benefits becomes virtually certain, the asset and the related income are recognised in the financial statements of the period in which the change occurs.L2
• Irdane is both the defendant in a dispute with a customer (adverse ruling probable, amount estimable) and the claimant in a dispute against a subcontractor (gain probable, amount estimable). Neither outcome is virtually certain. What is the overall treatment?L3
• Which of these situations at Jasmor best illustrates a contingent asset?L2
• When the realisation of income has become virtually certain, the related asset remains a contingent asset, merely disclosed in the notes.L3