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Contingent assets are any types of assets that have the potential of yielding some type of economic benefit due to circumstances beyond the control of the owner. Since the owner has no way of accurately projecting future events that may trigger these unknown benefits, the contingent asset is not accounted for on the company balance sheet. The asset is included in the financial statement notes issued by the business, making it possible to note its existence and provide the framework for reporting the contingent asset on the balance sheet if and when it does begin to yield some sort of tangible benefit.
In many situations, a contingent asset is some type of claim related to past events that may or may not ultimately yield some sort of measurable return. For example, a settlement from a pending lawsuit represents the potential for generating a return, if and when the suit is settled to the satisfaction of the business. Even if the company is very certain of how the suit will end, that anticipated return remains a contingent until the judge has made the final determination and the award has been granted by a court of law. At that point, the amount of the judgment can be entered as a gain and accounted for on the balance sheet of the company accounting records.
A contingent asset is not accounted for in the same manner as a contingent liability or loss. Using the same example of a lawsuit, the defendant company will arrange the books to allow for the worst case scenario, which is losing the suit and having to pay the plaintiff any sum awarded by the court. In many situations, the potential loss is recorded on the balance sheet, pending the outcome of the suit. If there is not sufficient data to provide a reasonable estimate of the contingent loss, then the defendant still provides the best estimate and accounts for it within the company financial statements.
The idea behind accounting for a contingent assets is to provide an honest and full rendering of the financial position of the company, while at the same time avoiding the perspective that the benefits are already available to the business. Doing so can be useful for several purposes, including public relations with consumers and with inspiring confidence among potential investors. This process also makes it much easier to fully incorporate the benefits into the accounting records and reflect those benefits on the balance sheet, should the contingent asset eventually provide real and tangible benefits.
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