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A contingent asset is a possible asset that arises from past events and whose existence 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 of a contingent asset is a legal claim being made by an enterprise. If the claim is successful, then the enterprise will receive compensation. But the outcome is uncertain and not within the control of the enterprise.

A contingent asset should not be recognised, but it should be disclosed if the future benefits is probable. If the future benefits is virtually certain, then it ceases to be a congtingent asset. It will be recognised as a normal asset.

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There are two types of contingent liabilities:

1. A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain futyre events not wholly within the control of the enterprise.

For example, a legal action brought against the enterprise that management think will be defeated. If it becomes apparent that the action will succeed and the enterprise will suffer a loss, then the contingent liability would be reclassified as a provision.

2. A present obligation that arises from past events but is not recognised becasue:
1. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
2. the amount of the obligation cannot be measured with sufficient reliability.

For example, an oil spillage occurs, the oil company will have to incur huge clean-up costs, but it may not be possible to make a quick and reliable estimate of these costs. A balance sheet drawn up immediately after the event may have to disclose the situation as a contingent liability rather than recognise a provision.

A contingent liability should not be recognised. It must be disclosed and reviewed regularly. If an outflow of economic benefits becomes probable then they must be reclassified as provisions.