What is a contingent asset?

Keywords: Mazars, Thailand, Accounting, Contingent asset

18 August 2021

As a result, contingent assets can be defined as follows:

• Contingent assets are potential economic benefits that are dependent on future events out of a company’s control.
• Upon meeting certain conditions, contingent assets are reported in the accompanying notes to the financial statements.
• They are recorded on the balance sheet only when the realization of cash flows associated with them becomes relatively certain.

As noted above, a contingent asset becomes a realized asset recordable in the balance sheet when the realization of cash flows associated with it becomes relatively certain. In this case, the asset is recognized in the period when the change in status occurs.

Contingent assets may arise due to the economic value being unknown. Alternatively, they might occur due to uncertainty relating to the outcome of an event where an asset may be created. A contingent asset appears because of previous events, but the entirety of all asset information will not be collected until future events happen.

There also exist contingent or potential liabilities. Unlike contingent assets, they refer to a potential loss that may be incurred, depending on how a certain future event unfolds.

Examples of Contingent Assets

1. A massive explosion and fire destroyed a factory producing plastic foam and plastic pellets in 2021. The factory has insurance to cover all damages. However, the extent of the damage is evaluated by the insurance company. At the end of the reporting period, the amount of money to be received from the insurance company has not been determined.  
2. A company is involved in a lawsuit with the expectation of receiving compensation has a contingent asset, because the outcome of the case is not yet known, and at the balance sheet date, the amount is yet to be determined.
3. Company A has filed a lawsuit against a third party for breach of contract. If there is a decent chance that Company A will win the case, it has a contingent asset. This potential asset will generally be disclosed in its financial statements, but not recorded as an asset until the lawsuit is settled.

As seen in the three examples above, the outcome of the cases has not been determined. The potential economic benefit depends on future events out of a company’s control.  As a result, the company cannot recognize the contingent asset in its financial statements until the outcome has been determined. However, the company needs to disclose potential assets in its notes to the financial statements.

Reference: TFAC