What is a Contingent Asset?

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. The concept is used as the basis for disclosures regarding this type of asset in the notes accompanying the financial statements of an organization. The disclosure rules related to contingent assets are as follows:

Do not recognize a contingent asset; only disclose it in the footnotes when an incoming payment is probable.
If the realization of income is virtually certain, then the related asset is no longer a contingent asset, and it can be recognized in the period when the change occurs.

Contingent Asset Assessments

Contingent assets should be regularly assessed to ensure that they are properly disclosed in the financial statements. This is an issue when a business initially reports a contingent asset, and then neglects to update its status; this can result in subsequent financial statement disclosures that mislead readers because they do not reflect the latest information about the asset.

Examples of Contingent Assets

Here are several examples of contingent assets:

Favorable lawsuit settlement. A company is involved in a legal case as a plaintiff and expects to win the case, potentially resulting in a significant monetary award. The benefit is contingent on the court ruling in the company’s favor.
Insurance claim. An entity has filed an insurance claim for damages caused by an insured event. The potential compensation from the insurer is a contingent asset until the insurer agrees to the claim.
Future royalties. A company is entitled to royalties or commissions from another entity based on the latter's future sales or revenues. The royalty income is contingent on those sales being realized.
Performance bonus from a contract. A construction company might be eligible for a performance bonus from a client if it completes a project ahead of schedule. The bonus remains a contingent asset until the project is completed and the bonus is confirmed.
Tax refund from disputed deductions. A company disputes a tax authority’s assessment and expects a favorable resolution, potentially resulting in a tax refund. The refund is contingent on the resolution of the dispute.
Future income from patents. A company holds a patent and expects licensing revenue, which depends on other entities choosing to license the technology in the future.

These examples illustrate situations where the entity might benefit economically, but the realization of the benefit depends on future events beyond their control.