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1.28 Theoretical Framework Principles and Practices of Accounting Paper 1
Case study 1.2 (continued)
One year later due to COVID pandemic, the situation of B Ltd worsened — Sales
reduced by a huge margin and it was difficult for B Ltd to repay the loan on time. Now
it has become probable that there will be outflow of economic resources for A Ltd, i.e.
A Ltd now more likely has to pay to the bank on behalf of B Ltd. There is an obligation
of uncertain amount. Therefore, A Ltd will create a provision in its books.
B Ltd has failed to repay the loan on due date, because of the guarantee clause and
A Ltd has to pay the loan to bank on behalf of B Ltd. There is an obligation of a certain
amount. A liability of the amount due to the bank is presented in the balance sheet.
Rapid Fire Q&A
Questions Answers
1. In the case of ___________, either outflow of resources (b) Contingent liability
to settle the obligation is not probable or the amount
expected to be paid to settle the liability cannot be mea-
sured reliability.
(a) Liability
(b) Contingent liability
(c) Provision
1.17 Contingent Asset
A possible asset that arises from past events and whose existence will be confirmed
by future events that cannot be controlled by the entity is called the contingent asset.
It usually arises from unexpected or unplanned events that give rise to possible inflow
of economic benefits to the enterprise.
Disclosure is not required for a contingent asset in the Financial Statement. A contin-
gent asset is disclosed usally in the report of the approving authority (Board of Direc-
tors) if an inflow of economic benefits is probable. The contingent assets are recognised,
when it becomes virtually certain to realise the income.
EXAMPLE 1.5
X Ltd has filed a case against Y Ltd for infringing the patent rights of X Ltd. X Ltd
may receive an amount of ₹ 20,00,000 if the case turns out in their favour. It is a
possible asset whose existence will be confirmed by the result of the legal proceed-
ings which are not wholly within the control of X Ltd.
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