Introduction
In accounting, dealing with uncertainty is part of the game.
What are Contingent Assets?
Explanation: It is an asset that may occur in the future or not. It is usually caused by unplanned reasons or activities, but it gives business something good,
When to Recognise? Only after it happens it is shown.
Disclosure requirements Not required unless they get in a agreement.
Example: Claiming Insurance: A company seeks a claim from an insurance provider, and will only claim that when confirmed.
What are Contingent Liabilities?
A contingent liability is a possible obligation. The settlement is not confirmed The payment will have impact from the companies influence.
Explanation: May occur depending on future events. These are potential risks that an entity faces because of past transaction.
Recognition criteria It is only recorded when proven.
Disclosure requirements: These do not show up as any account in the books.
Example A pending lawsuit for 3000 crores.
Provisions
Explanation: A provision is a liability of uncertain timing or amount. It is a present obligation arising from past events that is expected to result in an outflow of resources embodying economic benefits.
Recognition criteria: These are shown when there is high possibility of the transaction.
*Disclosure Requirements: There is no specific rule or action, but requires good amount of caution and precision
Example: Warranty. The company warranties to fix or change, but may have some amount.
Difference Between Contingent Liabilities, Provisions and actual liabilities
| Criteria | Liability | Provision | Contingent Liability |
| Definition | Present obligation arising from past events | Used only when known / A liability of uncertain timing or amount | A possible obligation from past events; existence confirmed by uncertain future events |
| Probability of Outflow | Probable outflow of resources to settle the obligation | Probable outflow of resources to settle the obligation | Not probable; outflow is only possible, not likely |
| Recognition | Always recognised in balance sheet | Recognized in balance sheet | Not recorded in BS unless possible out flow, and noted in notes |
| Reliability | Measured accurately | Relies only on estimates | Cannot be measured reliably |
| Disclosure in Financial Statement | Recognised at the current values | Recognise at present values | Not disclosed unless possibility is not remote |
| Example | Creditors, loan payables | Warranty claims or any known outflow | A legal case that has been filed |