Contingent Asset
Candlefocus EditorContingent assets are typically associated with a potential source of income from future prospects or activities that can be estimated yet, as of the reporting date, are uncertain or unproven. They either may not exist or may not be realized unless the conditions, on which they are based, come true.
Under US Generally Accepted Accounting Principles (GAAP) standards, a contingent asset is only reported when the realization of its future cash flows is probable. If a contingent asset has a higher likelihood of generating cash flows, it can be recorded in the statement of financial position.
Examples of contingent assets may include legal claims, trademark or patent rights, or potential revenue from a pending contract. Companies may record a contingent asset when they anticipate a favorable outcome or settlement that surpasses the required thresholds.
Contingent assets, by their nature, are uncertain and rely on events that are outside of the company's control. As such, they can change quickly and catch companies off guard. It is important for companies to monitor their contingent assets, as the corresponding risks can have a material unfavorable effect on the financial statements.
In conclusion, contingent assets are generally not reflected on financial statements but are disclosed as notes to the reports. They are assets that rely on certain independent events taking place in the future before any future cash flows can be realized. Companies should monitor their contingent assets for risk, as any changes or unfavorable outcomes can quickly impact a company’s finances.