Financial Accounting · Provisions and contingencies

Contingent Liabilities and Contingent Assets under IAS 37

Updated 11 October 2026 · Fact-checked

A contingent liability is a possible obligation, or a present obligation that cannot be measured reliably or is unlikely to need payment. A contingent asset is a possible inflow. Neither is recognised. Disclose a contingent liability unless the outflow is remote. Disclose a contingent asset only when an inflow is probable.

Understand Contingent Liabilities and Contingent Assets

IAS 37 separates uncertain items into three groups: provisions, contingent liabilities and contingent assets. The question is always the same. Do you have a present obligation, and how likely is the money to move?

A contingent liability is either (a) a possible obligation whose existence will be confirmed only by a future event outside the entity's control, or (b) a present obligation that is not recognised because payment is not probable, or the amount cannot be measured reliably. A lawsuit where the outcome is uncertain and payment is possible but not probable is a typical example.

A contingent asset is a possible asset arising from past events, whose existence will be confirmed only by an uncertain future event outside the entity's control. An example is a claim you have made against another party that is not yet settled.

The key difference from a provision is certainty. A provision is a present obligation, with a probable outflow and a reliable estimate. It goes in the accounts. A contingent liability fails at least one of those tests, so it is only disclosed, or ignored if remote.

Contingent assets get stricter treatment, because recognising income too early breaks prudence. Do not recognise them. Disclose only if an inflow is probable. If the inflow is virtually certain, it is no longer contingent. It is a real asset and you recognise it.

Key formulas to remember

Provision test: Present obligation + probable outflow + reliable estimate = recognise a provision; All three conditions must be met. Probable means more likely than not.
Contingent liability treatment: Possible obligation, or present obligation with payment not probable or not measurable: disclose unless remote. Remote: no disclosure; Never recognise a contingent liability in the statement of financial position.
Contingent asset: probable inflow: Inflow probable but not virtually certain: disclose only, do not recognise; Disclosure is in the notes. No entry in the ledger.
Contingent asset: virtually certain: Inflow virtually certain: recognise as an asset; It is no longer a contingent asset. Example: an insurance claim already agreed by the insurer.
Contingent asset: possible inflow: Inflow only possible: ignore, no disclosure; Do not mention it at all.

How to solve Contingent Liabilities and Contingent Assets questions

Use this order for any IAS 37 question about an uncertain gain or loss.

1Identify whether the item is a possible outflow (liability) or a possible inflow (asset).
2For an outflow, ask: did a past event create a present obligation at the reporting date? If it only might exist, it is a contingent liability.
3If there is a present obligation, check whether payment is probable and the amount can be estimated reliably. If both are yes, recognise a provision.
4If the outflow is not probable or cannot be measured, treat it as a contingent liability. Disclose it unless the chance of payment is remote.
5For an inflow, decide the likelihood: virtually certain, probable, or only possible.
6Virtually certain: recognise the asset and the income. Probable: disclose only. Possible: ignore.
7State the result clearly: recognise, disclose, or no action. In a multiple-choice question, match your result to the option wording.

Quickest way: Likelihood ladder

When to use it: Use this for multiple-choice questions where a scenario gives a probability word such as probable, possible or remote.

Underline the likelihood word in the question.
For a liability: probable and measurable means provision. Possible means disclose. Remote means nothing.
For an asset: virtually certain means recognise. Probable means disclose. Possible means nothing.
Remember that assets need a higher level of certainty than liabilities before they appear in the accounts.
Check the answer options for the exact word: recognise, disclose or ignore.

Common mistakes in Contingent Liabilities and Contingent Assets

Recognising a contingent asset when the inflow is merely probable.
Students apply the liability rule, where probable means recognise, to assets too.
Fix: Assets need virtually certain. Probable inflow is disclosure only.
Thinking every probable outflow is a provision.
Students forget the other conditions.
Fix: Check for a present obligation and a reliable estimate as well. If the amount cannot be measured, it is a contingent liability.
Disclosing remote contingent liabilities.
Students assume disclosure is always the safe choice.
Fix: If the chance of payment is remote, no disclosure is needed.
Treating a contingent liability as a provision because the amount is large.
Students let the size of the sum drive the answer.
Fix: Size does not decide the treatment. Obligation, likelihood and measurability do.
Still calling an item a contingent asset when the inflow is virtually certain.
Students keep the label from the scenario.
Fix: Once virtually certain, it is an ordinary asset and is recognised.

Worked examples

Example 1

At the reporting date, a company is defending a legal claim for $200,000. Lawyers advise that the outcome is uncertain and that payment is possible but less likely than not. What is the correct treatment?

Show the solution

The item is a possible outflow, so test it as a liability.
The existence of an obligation depends on the court outcome, which is outside the company's control.
Payment is less likely than not, so it is not probable and the provision conditions are not met.
This makes it a contingent liability.
The chance of payment is possible, not remote, so disclosure is required.
The disclosure includes an estimate of the financial effect where practicable. Here that is the $200,000 claimed. Nothing is recognised in the ledger.

Answer: Do not recognise a provision. Disclose a contingent liability of $200,000 in the notes, with an estimate of the financial effect where practicable.

Example 2

A company has claimed $50,000 from a supplier for faulty goods. Case A: the supplier's insurer has confirmed in writing that it will pay. Case B: the company's lawyers think receipt is probable, but nothing has been agreed. State the treatment in each case.

Show the solution

Case A: the insurer's written confirmation means the inflow is virtually certain.
When an inflow is virtually certain, the asset is not contingent, so recognise the $50,000 as a receivable.
Case B: the inflow is probable but not virtually certain.
So it is a contingent asset, which is disclosed in the notes but not recognised.

Answer: Case A: recognise a $50,000 asset (receivable). Case B: disclose a contingent asset of $50,000 only, with no entry in the accounts.

Exam tips

Learn the asymmetry: liabilities need probable to be recognised, assets need virtually certain.
Read for the exact likelihood word. Probable, possible and remote lead to different answers.
In multiple-response questions, check each statement against the rule separately.
If a question gives a present obligation but no reliable estimate, the answer is contingent liability, not provision.
Contingent items are not recognised or measured in the ledger, though disclosure includes an estimate of financial effect where practicable.

Practice questions from Provisions and contingencies

Contingent Liabilities and Contingent Assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Contingent Liabilities and Contingent Assets: frequently asked questions

What is the difference between a provision and a contingent liability?

A provision is a present obligation with a probable outflow and a reliable estimate, so you recognise it. A contingent liability is only a possible obligation, or a present obligation that is not probable or cannot be measured. You disclose it instead.

When should I disclose a contingent liability?

Disclose it whenever the possibility of payment is not remote. If payment is remote, you make no disclosure. If payment becomes probable and measurable, it becomes a provision.

How are contingent assets treated under IAS 37?

You never recognise a contingent asset. If the inflow is probable, disclose it in the notes. If it is only possible, ignore it. If it is virtually certain, it is no longer contingent and you recognise it.

What does virtually certain mean?

It means the inflow is so close to certain that the asset is no longer uncertain. An example is a claim already accepted and agreed by the other party. It is a much higher bar than probable.