Contingent assets are potential economic benefits that are not included on a company’s balance sheet but are disclosed in financial statements. They may arise from past events, such as a pending lawsuit, and are not accounted for in the same way as contingent liabilities or losses. The purpose is to provide an honest representation of the company’s financial position and to reflect benefits on the balance sheet if they become tangible.
Contingent assets are any type of assets that have the potential to produce some type of economic benefit due to circumstances beyond the control of the owner. Since the owner has no way of accurately projecting future events that might trigger these unknown benefits, the contingent asset is not accounted for on the company’s balance sheet. The asset is included in the notes to the financial statements issued by the business, which makes it possible to observe its existence and provides the framework for reporting the contingent asset on the balance sheet if it begins to produce some type of tangible benefit.
In many situations, a contingent asset is some type of claim related to past events that may or may not produce some type of measurable return. For example, a settlement of a pending lawsuit represents the potential to generate a return, as long as the lawsuit is resolved to the company’s satisfaction. Even if the company is very sure how the lawsuit will end, that early return is still contingent until the judge has made the final determination and the judgment has been granted by a court of law. At that point, the judgment amount can be entered as profit and posted to the balance sheet of the company’s accounting records.
A contingent asset is not accounted for in the same way as a contingent liability or loss. Using the same example of a lawsuit, the defendant company will organize the books to allow for the worst case scenario, which is losing the lawsuit and having to pay the plaintiff any amounts awarded by the court. In many situations, the potential loss is recorded on the balance sheet, pending the outcome of the lawsuit. If there is insufficient data to provide a reasonable estimate of the contingent loss, the defendant still provides the best estimate and explains it in the company’s financial statements.
The idea behind accounting for contingent assets is to provide an honest and complete representation of the company’s financial position, while avoiding the prospect that the benefits are already available to the business. Doing so can be useful for a number of purposes, including public relations with consumers and inspiring confidence among potential investors. This process also makes it much easier to fully incorporate benefits into the accounting records and reflect those benefits on the balance sheet, should the contingent asset ultimately provide real, tangible benefits.
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