There are many transactions/ events that are being taken place where an outcome of the resources are uncertain and no virtual expectations can be defined. This kind of instances could be some litigation cases, Insurance claims, price disputes adjustments pending for approval etc. Currently these are not being shown into the Financial Statements anywhere except via note in Board of Director’s report.
Current Indian Accounting has below provisions/ requirements related to the Contingent Assets –
AS -29 Provisions, Contingent Liabilities and contingent assets
Para -30- An enterprise should not recognise a contingent asset.
Para -31- Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise. An example is a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain.
Para -32- Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
Para -33- A contingent asset is not disclosed in the financial statements. It is usually disclosed in the report of the approving authority (Board of Directors in the case of a company, and, the corresponding approving authority in the case of any other enterprise), where an inflow of economic benefits is probable.
After the applicability of Ind-As/ IFRS , recognition of these instances will be different and recognition criteria has been defined which possibly will ensure to bring these items into financial statements by way of an extensive disclosures. Below are some of the relevant provisions related to the Contingent Assets as per Ind-As-
Ind-As- 37 – “Provisions, Contingent liabilities and Contingent Assets”
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.
Para -34 A –contingent asset is disclosed, as required by paragraph 89, where an inflow of economic benefits is probable.
Para -89- Where an inflow of economic benefits is probable, an entity shall disclose a brief description of the nature of the contingent assets at the end of the reporting period, and, where practicable, an estimate of their financial effect, measured using the principles set out for provisions in paragraphs 36–52.
Para – 23- “…………………. For the purpose of this Standard,1 an outflow of resources or other event is regarded as probable if the event is more likely than not to occur, ie the probability that the event will occur is greater than the probability that it will not ……………….”
Let’s take an example to understand what exactly are the requirements related to contingent asset and its recognition criteria.
A Private Company has made a claim of INR 10 Million against supplier who has breached the supplier’s agreement with the Company. The directors are of the opinion that the results of recent negotiations with the counterparty that have given strong indications that this claim is probable to be met in full in the near future.
First and foremost, let’s try to convince ourselves about the reason of why we should not recognize this as one of a receivable?.., and the reason is, because it is not certain although it is probable (more likely than not) that this amount will in-flow to the entity but not virtually certain. If the certainty would have been established then the claim would have been recognized in financial as current assets (receivables) as the basic assets recognition criteria would have met. Hence because it is likely (which means atleast 50% probability should exist) that this will inflow to the company, this will be qualify as Contingent Asset.
Now, if we talk about under current practice, there is no need to recognize this contingent asset into the financial statements except a disclosure in Board of Directors’s report. However under Ind-As these Contingent Assets will form part of financial statements as an extensive disclosure as defined under para 89 of Ind-As 37 and hence the company needs to mention a description about the nature of that asset.
Further, below are some specific disclosure requirements under the Accounting Standards which contains the rationales of disclosing or not disclosing certain facts related to the Contingent Assets-
Para -90 – It is important that disclosures for contingent assets avoid giving misleading indications of the likelihood of income arising.
Para -91- Where any of the information required by paragraphs 86 and 89 is not disclosed because it is not practicable to do so, that fact shall be stated.
Para-92- In extremely rare cases, disclosure of some or all of the information required by paragraphs 84–89 can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, an entity need not disclose the information, but shall disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.
The above requirements related to the disclosures essentially suggest that an entity should avoid any mis-leading information on account of “more likely than not assessment” and provide a relief to disclose a general statement about the Contingent Asset where it is related to some prejudice matter and can affect the position of the entity.
Management needs to re-look at all its existing processes in place to re-align them with this new requirement and accordingly to capture all such probable inflows to the company and document the same for such reasons for making them a part of disclosure into the Financial Statements. For the user of the Financial Statements, this would be more useful information in terms of its assessment about the company where certain inflows are likely to come in future.
A reader will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
(Author of this article is an experienced chartered accountant who has specialization on various GAAP conversions assignments covering different industries around different part of the world including acting as an Independent IFRS Advisor & Corporate Trainer. He can be reached via email at [email protected] or Whatsapp +91-9634706933)