Contingent Assets and Contingent Liabilities – CA Foundation Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.
Contingent Assets and Contingent Liabilities – CA Foundation Accounts Study Material
Question 1.
Contingent liability.
Answer:
Contingent liability:
(a) A contingent liability is a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.
Possible obligation – An obligation is a possible obligation if, based on the evidence available, its existence at the balance sheet date is considered not probable or
(b) A contingent liability is a present obligation that arises from past events but is not recognised because:
- it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
- a reliable estimate of the amount of the obligation cannot be made.
It is said to be ‘probable’ if chances of its happening are more than not happening i.e. probability is more than half.
Question 2.
Contingent Assets
Answer:
Contingent Assets:
- A contingent asset is a possible asset that arises from past events the existence of which will be confirmed
- only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.
- An example is a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain.
- An enterprise should not recognise a contingent asset.
- However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
- 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.
Question 3.
Provision and Contingent liability.
Answer:
Provision and Contingent liability:
| Provision | Contingent liability |
| Provision is a present liability of uncertain amount, which can be measured reliably by using a substantial degree of estimation. | A Contingent liability is a possible obligation that may or may not crys-tallise depending on the occurrence or non-occurrence of one or more uncertain future events. |
| A provision meets the recognition criteria. | A contingent liability fails to meet the same. |
| Provision is recognized when (a) an enterprise has a present obligation arising from past events; an outflow of resources embodying economic benefits is probable, and (b) a reliable estimate can be made of the amount of the obligation. | Contingent liability includes present obligations that do not meet the recognition criteria because either it is not probable that settlement of those obligations will require outflow of economic benefits, or the amount cannot be reliably estimated. |
| If the management estimates that it is probable that the settlement of an obligation will result in outflow of economic benebts, it recognises a provision in the balance sheet. | If the management estimates, that it is less likely that any economic benefit will outflow from the firm to settle the obligation, it discloses the obligation as a contingent liability. |
True or False
Question 1.
Present liability of uncertain amount, which can be measured reliably by using a substantial degree of estimation is termed as contingent liability.
Answer:
False: Present liability of uncertain amount, which can be measured reliably by using a substantial degree of estimation is termed as provision.
Question 2.
In the financial statement, contingent liability is recognized.
Answer:
False: In the financial statement, contingent liability is not recognized.
Question 3.
If an inflow of economic benefits is probable then a contingent asset is disclosed in the financial statements.
Answer:
False: If an inflow of economic benefits is probable then a contingent asset is 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).
Question 4.
Contingent asset usually arises from unplanned or unexpected events that give rise to the possibility of an outflow of economic benefits to the business entity.
Answer:
False: Contingent asset usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the business entity.