What is contingent asset?

A contingent asset is generally a possible asset that may arise caused by a gain that will be contingent on future events which have been not under a great entity’s control. Good accounting standards, a company does not identify a contingent asset even though the associated depending gain is possible.

A contingent asset becomes a realized (and therefore recordable) asset when the realization of income related to it is essentially certain. In this kind of case, recognize the asset within the period when the actual change occurs.

This treatment of a contingent asset generally isn’t consistent with dealing with a contingent culpability, which should be recorded if it is probable (thereby keeping the conservative nature in the financial statements).

The top example of both sides of any contingent asset and contingent liability is a lawsuit. Even if it’s probable that the actual plaintiff will win the way it is and receive a new monetary award, it cannot realize the contingent resource until such time since the lawsuit has already been settled. Conversely, the other party which is probably going to shed in the legal action must record a provision for the contingent liability after the loss turns into probable, and should not wait before lawsuit has been settled to do so. Thus, recognition in the contingent liability occurs before recognition in the contingent asset.

You may disclose the existence of any contingent asset in the notes accompanying the actual financial statements when the inflow of monetary benefits is likely. Doing so at the very least reveals the presence of any possible asset to the readers of the actual financial statements.

Auditors are specifically watchful for contingent assets which have been recorded in the company’s accounting information, and will insist they be eliminated from the records before issuing a belief on a business’s financial statements.