PRESENTATION

CONTINGENT ASSETS & CONTINGENT LIABITIES

ON

In the early stage of human life, when business transactions were very few, there was need for any scientific system. However, the size of business unit has grown considerably and factories on giant scale have been established, run by giant size companies. It is not possible for the businessmen in these circumstances to remember all the transactions hence accounting is necessity. All the transactions taking place in business relating to expenses, income, profits, losses, sales, purchase and assets must be systematically recorded.

What is Accounting

What is Assets

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected. Assets are not necessarily characterized by physical form like property, plant & equipment.

What is Liability
A companys legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services

PROVISION AND RESERVE

Provision is a present obligation (legal or constructive). In U.S GAAP provision means an expense while in IFRS it means a liability .so in U.S ., provision for income tax is same as the income tax expense .while in IFRS provision for taxes means liability for taxes payable. It is a liability for uncertain timing and amount. For Example :- TAX PROVISION , PROVISION FOR RETIREMENT BENEFIT OF EMPLOYEES. Reserves are kept back for future use or for a special purpose.

In general provision means a balance sheet item representing funds set aside by a company to pay the losses that are anticipated to accrue in future. RESEREVS:-the portion of current earnings set aside to take care of possible future losses or for other specified purpose.

PROVISION:-

DEFINITION OF PROVISION AND RESERVES

Provisions v/s reserves

Provision

Reserves
It is created only when there is a profit in he business. Created without taking into consideration the amount required. It can be distributed among the shareholders as dividend.

They are created irrespective of the profit or loss in the business. It is created for a definite amount so a specific sum of amount is set aside. It is not used as a distribution of dividend

provisions They are shown in the assets side. It is created to meet a known liability or contingency. Created by debiting the p/l a/c.

reserves

They are shown in the liability side as it us not a specific reserve. Created for a unknown liability or to strengthen the financial position of the company. Created by debiting the p/l appropriation a/c.

PROLOUGE TO CONTINGENT ASSETS

This is a potential asset associated with a contingent gain. They are not recorded in the accounts even though the amount can be estimated. These assets are often simply right to the future potential claim, are based on passed events.

Contingent Assets

Definition :Under international financial reporting standards, a contingent asset is a possible asset arising from past events and that will be confirmed only by future events not under an entity's control.

Examples of contingent assets

Favorable judgment of a law suit. Company A against Company B for infringement of Company As patent. If it is probable that Company A will win the lawsuit and receive an estimated amount of money, it has a contingent asset and a contingent gain.

However, it will not report the asset and gain until the lawsuit is settled.
If one of those are missing, Company B will have to disclose the loss contingency in the notes to its financial statements.

PROLOUGE TO CONTINGENT LIABILITY

A liability is a present obligation while the contingent liability is the future obligation. A liability which is not a liability in present but may become one upon the happening of the future event.

suppose if a father guarantees the student housing lease his son then the son is liable for the rent but the father becomes liable if the son default. Like the guarantees of the debts of others.

DEFINITION AND MEANING

ACCORDING TO IAS A liability that a company have to pay but only if a certain future event accurse usually it refers to the out come of a law suit i.e. the company have to pay the significant amount if it losses the law suit. A possible obligation depending on weather some uncertain future event accurse or a present obligation but the payment is not probable or the amount cannot be measured reliably.

RECORDED:-

They are recoded under accounts

payable.

EFFECTS:-

Their existence may also effects the share prices

EXAMPLES OF CONTINGENT LIABILITY

Guarantees and counter guarantees given by a company . Bankers furnish guarantees to the third party for the due performance of the company for which they intern demand a counter guarantee from the company

Guarantee that a company gives to another person on behalf of third party (loan given to the subsidiary or the guarantee that another co. will perform its contractual obligation.

EXAMPLES

Product warranty.

Share holders guarantee .

Letter of credit issued. Potential adverse judgment.(cases regarding any financial dispute ). Bills sent for collection.

Why a Company Do Provision for Contingent Assets & Liability

The basic three conditions for the provisioning that : There is a present obligations (legal or constructive) as a result of past events. It is possible that an outflow of resources including economic benefits will be required to settle the obligations. A reliable estimate can be made of the amount of the obligations.

A provision shall be used only for expenditures for which the provision was originally recognized. Use of provisions means the relevant expenses is adjusted against the provision. Provision is reviewed at the end of each reporting period.

Disclosures Requirements

Break up of provisions :-

Carrying amount at the beginning of the period + Additional provisions made during the year + Increase Because of unwinding of discount - Amount used against liability/loss - Amount reversed as provision is not required = Carrying amount at the end of the period .

CONCLUSION

From the presentation we can make out that how important provisions are for the company . Many times provision, contingent assets and contingent liability creates confusion. Suppose alicia limited co has a provision for damages in its financial statements in respect of the legal claim brought against at the company by one of its customers .In this they are not advised to create a provision instead of that they should have a disclosure of a contingent liability in the notes to the financial statements

Provisions must be recognize only if a present obligation has arisen as a result of a past event. And the amount of obligation can be estimated reliably. generally it is advised not to make a provision for a contingent assets and contingent liability. Some times the lenders request the borrowers to provide them the list of contingent liability while evaluating the financial strength of the company.