Question

Discuss with appropriate examples, contingent assets, contingent liabilities, and provisions as presented in IAS 37

Answer 1

IAS 37 deals with Provisions, Contingent Liabilities & Contingent Assets :

A provision is usually an amount that is set aside from a company’s profits, usually to cover an expected liability or a decrease in the value of an asset, even though the specific amount of the same might be unknown. A provision is a recognition of an upcoming liability, in advance.

For Example:

1. Provision for Bad Debts

2. Guarantees

3. Pension

4. Depreciation.

5. Income Tax Provision.

A contingent liability is defined as a liability which may arise depending on the outcome of a specific event. It is a possible obligation which may or may not arise depending on how a future event unfolds. A contingent liability is recorded when it can be estimated, else it should be disclosed.

For Example:

1. Potential Law Suits.

2. Product Warranties.

3. Pending Investigations under any law (Income Tax, Sales Tax or Legal Law).

A contingent asset is a possible asset that may arise because of a gain that is contingent on future events that are not under an entity's control. According to the accounting standards, a business does not recognize a contingent asset even if the associated contingent gain is probable.

For Example:

Let’s say Company XYZ has filed a lawsuit against Company ABC for infringing a patent. If there is a decent chance that Company XYZ will win the case, it has a contingent asset. This potential asset will generally be disclosed in its financial statement, but not recorded as an asset until the lawsuit is settled.