Contingent asset

A contingent asset is a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. (IAS 37 10)

In short:

Contingent asset


A contingent asset is an asset that depends on some future happening that may or may not occur. Its existence or value is not assured. A contingent asset may arise from a contigent liability.Contingent assets are not recognised in the statement of financial position. When realisation of a contingent asset is virtually certain, it is no longer considered contingent and is recognised as an asset. [IAS 37 31, IAS 37 33, IAS 37 35]

Contingent assets are disclosed (not recognised) when an inflow of economic benefits is considered probable (i.e. more likely than not to occur). The disclosure includes the nature and, when it is practicable, the estimated future effects of the contingent asset. [IAS 37 89–91] Doing so at least reveals the presence of a possible asset to the readers of the financial statements.

In IFRS 3 Business combinations contingent assets also do not exist, the reasoning being – If an entity determines that an asset exists at the acquisition date (ie that it has an unconditional right at the acquisition date), that asset is not a contingent asset and should be accounted for in accordance with the appropriate IFRS.

The treatment of a contingent asset is not consistent with the treatment of a contingent liability, which should be recorded when it is probable (thereby preserving the conservative nature of the financial statements).
The best example of both sides of a contingent asset and contingent liability is a lawsuit. Even if it is probable that the plaintiff will win the case and receive a monetary award, it cannot recognize the contingent asset until such time as the lawsuit has been settled. Conversely, the other party that is probably going to lose the lawsuit must record a provision for the contingent liability as soon as the loss becomes probable, and should not wait until the lawsuit has been settled to do so. Thus, recognition of the contingent liability comes before recognition of the contingent asset.

Example 1 – An example of a contingent asset may be a successful lawsuit claiming damages of another party of which outcome is unsecure. It cannot (yet) be shown as an asset on the balance sheet because it violates conservatism. However, footnote disclosure may be made.

Example 2 – Contingent proceeds in the form of rights to a non-financial asset (for example, an intangible asset or an item of property, plant and equipment) are a contingent asset within the scope of IAS 37; it is not recognised until it is virtually certain that the seller will receive that asset [IAS 37 31, IAS 37 33]. These arrangements are rarely seen in practice.

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Example disclosure – Contingent Asset

Examples are a great way to demonstrate the IFRS accounting for contingent assets. Here are some, read them carefully to improve your understanding!

The case 1:

A mission is based in a country where the government has agreed to make facilities it owns available to the mission free of charge. Midway through the financial year, the mission receives information that the hotel complex it is renting appears to be owned by the government. The mission ceases rent payments immediately until the hotel complex establishes that it can rightfully charge rent. At year end, legal advice indicates that it is probable the mission does can recover rent payments made for the first half of the year and will not have to pay the unpaid amounts for the second half of the year.

The mission discloses a contingent liability for the unpaid rent for the second half of the year, as it still has a possible obligation that it may have to pay the rent.

But the mission has received legal advice that rent it has paid in the first half of the financial year for a hotel complex is more likely than not to be recoverable. In this circumstance, the mission discloses a contingent asset for the rent it paid for the first half of the year.

If the legal advice had indicated that the rent was less likely than not to be recoverable, the mission would not disclose a contingent asset.

The case 2:

A Roads and Highway developer (‘Developer’) filling a cost overrun litigation against Roads and Highway Authority (‘Authority’) for reimbursement of cost overrun incurred by the Developer on account of delay in handing over the land by Authority to Developer for construction of the Project.

As per the Contract between Developer and Authority, land acquisition for the Project was supposed to be carried out by the Authority and was to be handed over to Developer in a definite timeframe. Since the Authority could not hand over the required land to Developer for development of the Project as per schedules in the contract leading to an increase in overall project cost, Developer files litigation against the Authority for reimbursement of incremental cost incurred by the Developer.

Estimated costs as per contracts 100,000,000
Actual costs at completion 150,000,000
Cost overrun due to delay in land handover 50,000,000

Note – This is based on assumption that entire cost overrun was on account of delay in handing over of land to Developer by the Authority. This is one of those items that will cause endless yes/no, right/wrong discussions.

In the above demonstration, the Developer has filed litigation against the Authority for reimbursement of $ 50 million, which is the incremental cost incurred due to delay on part of Authority. Therefore, Contingent Asset, in this case, is $ 50 million. This asset shall not be recognized in Developer’s Audited Report unless there is a certainty for reimbursement of cost overrun amount from the Authority.

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Once this litigation is awarded to the Developer by the relevant Authority, this will become an Asset which will be recognized in the Balance Sheet of the Developer.

The case 3:Logo Apple Inc

The possibility of gain from a lawsuit against a company for patent infringement
Apple Inc. vs Samsung Electronics Co., Ltd, et al. (Form 10-K Apple Inc Period ending 29/09/2012)
On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung Electronics and affiliated parties in the United States District Court, Northern District of California, San Jose Division. Because the award is subject to entry of final judgment and may be subject to appeal, the Company has not recognized the award in its consolidated financial statements for the year ended September 29, 2012.
Apple Inc. v. Samsung Electronics Co., Ltd, et al. (Form 10-K Apple Inc Period ending 28/09/2013)
On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung Electronics Co., Ltd and affiliated parties in the United States District Court, Northern District of California, San Jose Division. On March 1, 2013, the District Court upheld $599 million of the jury’s award and ordered a new trial as to the remainder. Because the award is subject to entry of final judgment, partial re-trial and appeal, the Company has not recognized the award in its results of operations.

Apple Inc. v. Samsung Electronics Co., Ltd, et al. (Form 10-K Apple Inc Period ending 27/09/2014)
On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung Electronics Co., Ltd and affiliated parties in the United States District Court, Northern District of California, San Jose Division. On March 6, 2014, the District Court entered final judgment in favor of the Company in the amount of approximately $930 million. Because the award is now subject to appeal, the Company has not recognized the award in its results of operations.

Apple Inc. v. Samsung Electronics Co., Ltd, et al. (Form 10-K Apple Inc Period ending 26/09/2015)
On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung Electronics Co., Ltd and affiliated parties in the United States District Court, Northern District of California, San Jose Division. On March 6, 2014, the District Court entered final judgment in favor of the Company in the amount of approximately $930 million. On May 18, 2015, the U.S. Court of Appeals for the Federal Circuit affirmed in part, and reversed in part, the decision of the District Court.

As a result, the Court of Appeals ordered entry of final judgment on damages in the amount of approximately $548 million, with the District Court to determine supplemental damages and interest, as well as damages owed for products subject to the reversal in part. Because the ruling remains subject to further proceedings, the Company has not recognized the award in its results of operations.

Apple Inc. v. Samsung Electronics Co., Ltd, et al. (Form 10-K Apple Inc Period ending 24/09/2016)
On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung Electronics Co., Ltd. and affiliated parties in the United States District Court, Northern District of California, San Jose Division. On March 6, 2014, the District Court entered final judgment in favor of the Company in the amount of approximately $930 million .

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On May 18, 2015, the U.S. Court of Appeals for the Federal Circuit affirmed in part, and reversed in part, the decision of the District Court. As a result, the Court of Appeals ordered entry of final judgment on damages in the amount of approximately $548 million , with the District Court to determine supplemental damages and interest, as well as damages owed for products subject to the reversal in part.

Samsung paid $548 million to the Company in December 2015, which was included in net sales in the Condensed Consolidated Statement of Operations. Because the case remains subject to further proceedings, the Company has not recognized any further amounts in its results of operations. On October 11, 2016, the United States Supreme Court heard arguments in Samsung’s request for appeal related to the $548 million in damages.

Apple Inc. v. Samsung Electronics Co., Ltd., et al. (Form 10-K Apple Inc Period ending 30/09/2017)
On August 24, 2012, a jury returned a verdict awarding the Company $1.05 billion in its lawsuit against Samsung ElectroniApple Samsung logocs Co., Ltd. and affiliated parties in the United States District Court, Northern District of California, San Jose Division. On March 6, 2014, the District Court entered final judgment in favor of the Company in the amount of approximately $930 million . On May 18, 2015, the U.S. Court of Appeals for the Federal Circuit affirmed in part, and reversed in part, the decision of the District Court.

As a result, the Court of Appeals ordered entry of final judgment on damages in the amount of approximately $548 million , with the District Court to determine supplemental damages and interest, as well as damages owed for products subject to the reversal in part. Samsung paid $548 million to the Company in December 2015, which was included in net sales in the Consolidated Statement of Operations.

On December 6, 2016, the U.S. Supreme Court remanded the case to the U.S. Court of Appeals for the Federal Circuit for further proceedings related to the $548 million in damages. On February 7, 2017, the U.S. Court of Appeals for the Federal Circuit remanded the case to the District Court to determine what additional proceedings, if any, are needed. On October 22, 2017, on remand from the U.S. Supreme Court, the District Court ordered a new trial on damages.

The Form 10-K for the period ending 30/09/2017 was the last year this contingent asset was disclosed.

Another example is a possibility of gain to an enterprise from a lawsuit for patent infringement against another enterprise. Historically patent infringement lawsuits are quite common in some industries such as Pharma, Technology etc. In this case, the lawsuit for patent infringement by an enterprise is contingent asset for the enterprise. However, it is a contingent liability for the company at receiving the end of the lawsuit/responder to lawsuit.

Contingent asset Contingent asset Contingent asset Contingent asset

Contingent asset    Contingent asset

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