Page 26 - IC26 LIFE INSURANCE FINANCE

UNIT 7: CONTINGENT ASSETWAND CONTINGENT LIABILITIES

1. Contingent Assets: A contingent asset may be defined as a possible asset that arises

from past events and existence will be confirmed only after occurrence or non-
occurrence of one or more uncertain future events not wholly within the control of
the enterprise.

As per the concept of prudence as well as the present Accounting standards, an
enterprise should not recognize a contingent asset.

2. Contingent Liability : A contingent liability is a possible obligation arising from past
events and may arise in future depending on the occurrence or non-occurrence of
one or more uncertain future events.

It may also be a present obligation that arises from past events.

3. Provision: It means any amount written off or retained by way of providing for
depreciation, renewal or in the value of assets or retained by way of providing for any

known liability of which the amount cannot be determined with substantial accuracy.

S. No. Provision Contingent Liability
1. Provision is a present liability of Contingent liability is a possible obligation
uncertain amount which can be that may or may not crystallize depending
measured reliable by using a on the occurrence or non-occurrence of one
substantial degree of estimation. or more uncertain future events.
2. A provision meets the recognition A contingent liability fails to meet the same.
criteria.
3. Provision is recognized when (a) an Contingent liability includes present
enterprise has a present obligation obligations that do not meet the recognition
arising from past events; an outflow criteria because either it is not probable that
of resources embodying economic settlement of those obligations will
benefits is probable, and (b) a recognize outflow of economic benefits or
reliable estimate can be made of the Amount cannot be reliably estimated.
the amount of the obligation.
4. If the management estimates that it If the management estimates that it is less
is probable that the settlement of likely that any economic benefit will outflow
an obligation will result in outflow the firm to settle the obligation, it discloses
of economic benefits, it recognizes a the obligation as a contingent liability.
provision in the Balance Sheet.

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