CONTINGENT LIABILITIES, CONTINGENT ASSETS

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CHAPTER 16

• CONTINGENT LIABILITIES, CONTINGENT ASSETS
• AND
• EVENTS AFTER THE BALANCE SHEET DATE

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1.IAS37PROVISIONS,CONTINGENT LIABILITIES AND
CONTINGENT ASSETS

• Contingent liability
• -A possible obligation that arises form 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.
• -A present obligation that arises from past
  events but is not recognized because

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• --It is not probable that an outflow of
  resources embodying economic benefits will be
  required to settle the obligation or
• --The amount of the obligation cannot be
  measure with sufficient reliability.
• Contingent asset 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.

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• Accounting treatment depends on the degree of
  probability and on whether the contingency is a
  potential asset or a potential liability.
• IAS 37recognises four degrees of probability for
  contingencies, but gives no guidance as to the
  meaning of these terms. One possible
  interpretation is included in the following table

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• degree of degree of
  contingent contingent
• probability probability
  liabilities assets
• Virtually certain Probability
  Provide Recognize
• (therefore not above 95
• Contingent)
• Probable Probability
  Provide Disclose
• above 50 and
  by
  note
• up to 95
• Possible Probability 5 to
  Disclose by No disclosure
• 50
  note
• Remote Probability
  No disclosure No disclosure
• below 5

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• When there is the possibility of recovery from a
  third party of all or part of a contingent
  liability ,this must be treated as a separate
  matter, and a contingent asset only recognised if
  its receipt is virtually certain, as shown in the
  table.
• When disclosure is made by note should state
• -the nature of the contingency
• -the uncertain factors that may affect the
  future
• outcome
• -an estimate of the financial effect, or a
  statement that
• such an estimate cannot be made.
• In the case of a contingent asset, care should be
  taken not to give a misleading impression as to
  the likelihood of realization.

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2. IAS 10enents after the balance sheet date

• Events after the balance sheet date those
  events, both favorable and unfavourable, that
  occur between the balance sheet date and the date
  on which the financial statements are authorized
  for issue.
• Adjusting events those which provide additional
  evidence to assist with the estimation of amounts
  relating to conditions at the balance sheet date.
  Financial statements must be adjusted.
• Examples include

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• -Sales of inventory at less than cost,
  necessitating a reduction in the valuation of
  closing inventory
• -Bankruptcy of a trade customer, requring the
  debt to be written off in whole or part
• -Amounts received or receivable in respect of
  insurance claims which were being negotiated at
  the balance sheet date.

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• Non-adjusted events those which do not affect
  the condition of assets or liabilities at the
  balance sheet date but are f such importance that
  their non-disclosure would affect users
  decision-making. Details must be given in a note.
• Examples include
• -The issue of new share or loan capital
• -Major changes in the composition of the
• company (for example, acquisitions of new
• business)
• -Financial consequences of losses of
  non-current
• assets or inventory as a result of fires or
  floods.

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• Proposed dividends it is not acceptable to
  include dividends proposed or declared on equity
  after the balance sheet date in that balance
  sheet as liabilities.
• Proposed equity dividends must be shown
• -Either in the notes to the financial
  statements
• -Or on the fact of the balance sheet as an
  appropriation within equity

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• Going concern status in doubt if, after balance
  sheet date, the management of an enterprise
  determines either that it intends to liquidate
  the enterprise or cease trading, or that is has
  no realistic alterative but to do so ,the
  financial statements should not be prepared on a
  going concern basis.
• Date of issue of financial statement the
  financial statements should disclosure the date
  they were authorized for issue and who gave that
  authorization.

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• Disclosure of power to amend if the owners or
  others have the power to amend the financial
  statements after issue, that fact should be
  disclosure.
• Updating of disclosures an enterprise should
  update disclosures in the financial statements
  that relate to conditions existing at the balance
  sheet date in the light of information received
  after the balance sheet date.