Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period

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 fails recognition, depending on uncertain future events. A contingent asset is a possible asset arising from past events. Neither is recognised in the statement of financial position. Disclose a contingent liability unless remote, and a contingent asset only if an inflow is probable.

Understand Contingent Liabilities and Contingent Assets

IAS 37 separates three things: provisions, contingent liabilities and contingent assets. The split depends on two tests: is there a present obligation from a past event, and is an outflow probable and reliably measurable?

A provision is a liability of uncertain timing or amount. You recognise it when there is a present obligation (legal or constructive) from a past event, an outflow of economic benefits is probable (more likely than not), and a reliable estimate can be made.

A contingent liability is either (a) a possible obligation whose existence will be confirmed only by uncertain future events outside the entity's control, or (b) a present obligation that is not recognised because an outflow is not probable or the amount cannot be measured reliably. You do not recognise it. You disclose it unless the chance of outflow is remote.

A contingent asset is a possible asset whose existence will be confirmed only by uncertain future events outside the entity's control. You do not recognise it. If an inflow of benefits is probable, you disclose it. If the inflow is virtually certain, it is no longer a contingent asset. It is an asset and you recognise it.

Business combinations are the main exception. Under IFRS 3, the acquirer recognises a contingent liability of the acquiree at fair value at the acquisition date if it is a present obligation arising from a past event and its fair value can be measured reliably. This applies even if an outflow is not probable. Contingent assets of the acquiree are not recognised.

Key rules to remember

Contingent liability: recognition: Not recognised in the statement of financial position; Applies to possible obligations, and to present obligations where outflow is not probable or the amount cannot be measured reliably.
Contingent liability: disclosure: Disclose unless the possibility of outflow is remote; Give a brief description, an estimate of financial effect, the uncertainties on amount or timing, and the possibility of reimbursement, where practicable.
Contingent asset: recognition and disclosure: Inflow virtually certain → recognise as an asset; inflow probable → disclose; otherwise → no disclosure; Virtually certain is a much higher threshold than probable.
Provision test: Present obligation + probable outflow + reliable estimate → recognise; If any one test fails, you have a contingent liability or nothing.
Business combination: Acquiree contingent liability: recognise at acquisition-date fair value if a present obligation and reliably measurable; Probability of outflow is not required. Acquiree contingent assets are not recognised.
Reimbursements: Reimbursement recognised as a separate asset only when virtually certain; The provision is shown gross, and the reimbursement asset is separate. P&L may net them.

How to solve Contingent Liabilities and Contingent Assets questions

Use this order for any scenario question on a possible obligation or possible gain.

1Identify the past event. Ask what happened on or before the reporting date that could create an obligation or an asset.
2Decide whether there is a present obligation at the reporting date. Legal advice and constructive obligation facts matter. If it is only possible, you have a contingent liability.
3If there is a present obligation, test probability of outflow (more likely than not) and whether a reliable estimate exists.
4Classify: provision (recognise), contingent liability (disclose unless remote) or nothing (remote).
5For possible gains, test the inflow: virtually certain means recognise, probable means disclose, anything less means no disclosure.
6Check for a business combination. If the item is an acquiree contingent liability at the acquisition date, measure it at fair value and include it in the net assets acquired, which reduces goodwill.
7Write the answer: state the rule, apply it to the facts with numbers, state the treatment and the disclosure, then add your professional comment on judgement or bias.

Quickest way: Three-question triage

When to use it: Use it when the scenario is short and you must classify quickly, such as part of a multi-issue question.

Is there a present obligation from a past event? If no, it is a contingent liability, or remote and ignored.
If yes, is an outflow probable and measurable? If yes, provision. If no, contingent liability.
For a gain: virtually certain means asset, probable means disclose, else silent. Then say whether it is a business combination.

Common mistakes in Contingent Liabilities and Contingent Assets

Recognising a contingent liability because the amount is large.
Students think size drives recognition and ignore the probability test.
Fix: Size affects disclosure and materiality only. Recognition depends on a present obligation, probable outflow and reliable estimate.
Treating a probable inflow as an asset.
Students apply the provision threshold (probable) to assets.
Fix: Assets need virtually certain. Probable only requires disclosure of the contingent asset.
Saying a contingent liability is never recognised.
The general rule is learned without the business combination exception.
Fix: Acquiree contingent liabilities that are present obligations and measurable at fair value are recognised at the acquisition date under IFRS 3.
Ignoring remote possibility when stating disclosure.
Students memorise 'disclose contingent liabilities' only.
Fix: Add 'unless the possibility of outflow is remote'. If it is remote, no disclosure is needed.
Netting an insurance recovery against the provision on the statement of financial position.
Students want a single net figure.
Fix: Show the provision gross. Recognise the reimbursement as a separate asset only if virtually certain.
Forgetting that a contingent asset or liability must be reassessed each period.
Students treat the classification as permanent.
Fix: Review at each reporting date. If an outflow becomes probable, recognise a provision. If an inflow becomes virtually certain, recognise the asset.

Worked examples

Example 1

At 31 March, Rana Ltd is defending a claim from a customer for $2 million over a faulty product. Its lawyers advise that the claim is unlikely to succeed, with the chance of loss estimated at 20%. Rana also expects a $500,000 insurance refund if it loses. How should Rana report this at 31 March?

Show the solution

Past event: the sale of the product, before the reporting date. A claim exists, but it is disputed.
Obligation and outflow: lawyers say success is unlikely, so an outflow is not probable (20% is below more likely than not).
Classification: not a provision. It is a contingent liability because a present obligation is not shown to be probable.
Disclosure: the chance of outflow is not remote at 20%, so disclose a description, an estimate of financial effect ($2 million) and the uncertainties.
Insurance refund: this is only a possible gain and is not virtually certain. Do not recognise it. Do not disclose it as a contingent asset unless an inflow is probable, which it is not.

Answer: No provision and no asset recognised. Disclose a contingent liability of up to $2 million with a description and the uncertainties. Do not recognise or disclose the insurance refund.

Example 2

Tara plc acquires Mehta Ltd on 1 July. Mehta faces a lawsuit arising from a pre-acquisition event. Tara estimates that the fair value of the obligation at 1 July is $3 million, although an outflow is not probable. Mehta also has an unrecognised possible claim against a supplier. Fair value of Mehta's identifiable net assets, before these items, is $40 million, and consideration is $50 million. Calculate goodwill and explain.

Show the solution

The lawsuit is a present obligation from a past event with a reliably measurable fair value of $3 million. Under IFRS 3, the acquirer recognises it even though outflow is not probable.
The supplier claim is a contingent asset of the acquiree. Do not recognise it.
Net identifiable assets: 40 − 3 = $37 million.
Goodwill = consideration − net identifiable assets = 50 − 37 = $13 million.
After acquisition, the liability is measured at the higher of the amount under IAS 37 and the amount initially recognised less any income recognised under IFRS 15, unless it is settled.

Answer: Goodwill is $13 million. The $3 million contingent liability is recognised at the acquisition date, and the supplier claim is not recognised.

Exam tips

Always give the threshold words: probable for provisions and disclosing contingent assets, virtually certain for recognising an asset, remote for ignoring a contingent liability.
Use the facts given. Quote the lawyer's opinion, the percentage, or the wording of a contract, then link it to the test.
If the scenario involves an acquisition, check immediately for the IFRS 3 exception before writing 'not recognised'.
Professional skills marks reward comment on judgement. Mention that management may be biased to understate liabilities or overstate gains, and that auditors will want evidence such as legal letters.
Keep the answer short per issue: rule, application, treatment, disclosure.

Practice questions from Provisions, contingencies and events after the reporting period

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 contingent liability and a provision?

A provision is a recognised liability: there is a present obligation, an outflow is probable and the amount can be estimated reliably. A contingent liability fails one of those tests, or is only a possible obligation. It is disclosed, not recognised.

When is a contingent asset recognised?

Only when the inflow of economic benefits is virtually certain. At that point it is no longer a contingent asset, and you recognise it as an asset. If the inflow is only probable, you disclose it.

Is a contingent liability ever recognised in a business combination?

Yes. The acquirer recognises an acquiree's contingent liability if it is a present obligation from a past event and its fair value can be measured reliably. Probability of outflow is not tested. Contingent assets of the acquiree are not recognised.

What must be disclosed for a contingent liability?

Disclose a brief description of the nature, an estimate of its financial effect, the uncertainties about the amount or timing of any outflow, and the possibility of any reimbursement, where practicable. No disclosure is needed if the possibility of outflow is remote.