Financial Reporting · Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Contingent Liabilities and Contingent Assets under Ind AS 37 (CA Final)

Updated 5 October 2026 · Fact-checked

A contingent liability is a possible obligation, or a present obligation that is not recognised, and it is only disclosed. A contingent asset is a possible inflow and is not recognised. If an outflow becomes probable, make a provision. If an inflow becomes virtually certain, recognise the asset. Reassess both at every reporting date.

Understand Contingent Liabilities and Contingent Assets

Start with the idea behind Ind AS 37. You recognise a liability only when you truly owe something and can estimate it. Many items fall short of that. They are uncertain, so the standard puts them in the notes instead of the balance sheet.

A contingent liability is of two kinds. One is a possible obligation that arises from past events, and its existence will be confirmed only by uncertain future events not wholly in the entity's control. The other is a present obligation that is not recognised because an outflow is not probable, or because the amount cannot be measured reliably. Example: a customer sues you and your lawyers say you will probably win.

A contingent asset is a possible asset that arises from past events, and its existence will be confirmed only by uncertain future events not wholly in the entity's control. Example: you have sued a supplier for damages and the case is pending. The standard is cautious here. You do not recognise the asset in the financial statements.

The treatment depends on the likelihood. For a contingent liability: if an outflow is probable, you recognise a provision; if it is only possible, you disclose it; if it is remote, you do nothing. For a contingent asset: if an inflow is probable, you disclose it; if it is virtually certain, it is no longer contingent and you recognise the asset. Ind AS uses 'probable' to mean more likely than not.

The status is never fixed. You reassess every reporting date. A contingent liability can become a provision, and a contingent asset can become a recognised asset. A contingent liability can also drop to remote and then needs no disclosure.

Key rules to remember

Contingent liability: probable outflow: Present obligation + outflow probable + reliable estimate → Provision (recognise); Probable means more likely than not. This is a provision, not a contingent liability.
Contingent liability: disclosure rule: Possible obligation, or present obligation with no recognition → Disclose, unless outflow is remote; Disclose a brief description, an estimate of financial effect, the uncertainties and the possibility of reimbursement, where practicable.
Contingent liability: remote outflow: Outflow remote → No recognition, no disclosure; Remote is the only level of likelihood where no disclosure is needed.
Contingent asset: probable inflow: Inflow probable → Disclose only (not recognise); Disclose the nature and, where practicable, the estimated financial effect.
Contingent asset: virtually certain: Inflow virtually certain → Not contingent; recognise the asset; Recognise the asset in the period in which the change occurs. The exception is an adjusting event after the reporting period under Ind AS 10. In that case, recognise it in the earlier reporting period.
Ongoing assessment: Review at each reporting date; Move items between provision, contingent liability, and recognised asset as the facts change.

How to solve Contingent Liabilities and Contingent Assets questions

Use this method for any question on contingent items. State the likelihood, the treatment and the disclosure in each step.

1Identify the past event. Ask whether it has already happened by the reporting date.
2Decide the nature: is there a present obligation, a possible obligation, or a possible asset?
3Judge the likelihood of outflow or inflow: virtually certain, probable, possible or remote.
4For a liability, apply the rule: probable and reliably measurable means provision; otherwise disclose unless remote.
5For an asset, apply the rule: virtually certain means recognise; probable means disclose; otherwise nothing.
6Quantify. Give the amount to be provided or disclosed, using the best estimate where a provision applies.
7State the reassessment point: say how the treatment changes if facts change before the financial statements are approved or in the next period.
8Write the answer as provision, facts, conclusion, with the note disclosure in words.

Quickest way: Probability ladder

When to use it: Use it for MCQs and short case scenarios where you must name the treatment fast.

Liability side: probable gives provision, possible gives disclose, remote gives nothing.
Asset side: virtually certain gives recognise, probable gives disclose, anything lower gives nothing.
Check first whether the obligation is a present one. If yes and probable with a reliable estimate, it is a provision.
If a reimbursement is virtually certain, recognise it as a separate asset, not netted into the provision. The expense in the statement of profit and loss may be shown net of the reimbursement.

Common mistakes in Contingent Liabilities and Contingent Assets

Recognising a contingent asset in the books when the inflow is only probable.
Students apply the same probable test to assets as to liabilities.
Fix: For assets the recognition bar is virtually certain. Probable only gives disclosure.
Saying a remote contingent liability must be disclosed.
Students remember that contingent liabilities are disclosed and ignore the exception.
Fix: If the possibility of outflow is remote, there is no disclosure at all.
Treating a probable outflow as a contingent liability.
Students assume any court case is contingent.
Fix: A present obligation with a probable outflow and a reliable estimate is a provision. Only the unrecognised cases are contingent.
Ignoring the later change in status.
Students treat the classification as permanent.
Fix: Reassess at each reporting date and say what happens if the case is lost or won.
Netting expected reimbursement against the provision.
Students want to show one net figure.
Fix: Show the provision gross in the balance sheet. Recognise the reimbursement as a separate asset only when it is virtually certain. The expense in the statement of profit and loss may be shown net of the reimbursement.
Writing a contingent liability as a balance sheet liability and also in the notes.
Students mix up recognition and disclosure.
Fix: A contingent liability is never recognised. It appears only in the notes.

Worked examples

Example 1

Alpha Ltd sold goods before 31 March. A customer found them defective and filed a suit for ₹40,00,000 before 31 March. At 31 March the lawyers advise that the claim will probably fail, but there is a possibility of a loss. State the treatment in Alpha's financial statements at 31 March. After 31 March but before the financial statements are approved, the court passes an order in the same suit and Alpha must pay ₹25,00,000. State how the treatment changes.

Show the solution

The past event is the sale of the defective goods, and the suit was filed before the reporting date. So the claim existed at 31 March.
Based on the lawyers' advice, it is not probable that Alpha has to pay, but the outflow is possible.
A possible outflow means a contingent liability. It is not recognised.
Disclose a brief description, the uncertainties and the estimated financial effect where practicable. The claim of ₹40,00,000 shows the maximum exposure, but it is not necessarily the estimate of the financial effect, which should reflect the likely loss.
The court order is received after the reporting date but before approval of the financial statements. It relates to the same suit that existed at 31 March, so it gives evidence of a condition at the reporting date. It is an adjusting event under Ind AS 10.
Because it is adjusting, the outflow is treated as probable at 31 March and the amount is ₹25,00,000. Recognise a provision of ₹25,00,000 in the year ended 31 March.

Answer: At 31 March, disclose a contingent liability and recognise nothing. Give the description, the uncertainties and the estimated financial effect where practicable. The ₹40,00,000 claim is the exposure, not necessarily the estimate of effect. The court order is received after the reporting date but before approval, and it relates to a claim that existed at 31 March. So it is an adjusting event, and Alpha recognises a provision of ₹25,00,000 in the year ended 31 March.

Example 2

Beta Ltd's plant was damaged by a fire before the reporting date, and Beta lodged a claim of ₹12,00,000 with its insurer before that date. At the reporting date, the insurer has not accepted the claim. Beta's legal adviser says acceptance is probable. After the reporting date but before the financial statements are approved, the insurer confirms payment of ₹12,00,000 in writing. Give the treatment at each stage.

Show the solution

The fire and the claim both existed at the reporting date. The insurer's payment is an uncertain inflow not wholly in Beta's control, so at that date it is a contingent asset.
At the reporting date the inflow is probable, not virtually certain.
So do not recognise the claim on that basis. Disclose the nature of the contingent asset and the estimated financial effect of ₹12,00,000 where practicable.
The insurer's written confirmation arrives after the reporting date but before approval. It is evidence of a condition that existed at the reporting date, namely the valid claim arising from the fire. So it is an adjusting event under Ind AS 10.
The confirmation shows the inflow is virtually certain. The asset is no longer contingent.
Because the event is adjusting, recognise the receivable of ₹12,00,000 as an asset in the year ended at the reporting date, not in a later period.

Answer: On the facts at the reporting date alone, the inflow is only probable, so disclose a contingent asset of ₹12,00,000 and recognise nothing. The fire and the claim existed at the reporting date, and the insurer's written confirmation is evidence of that condition. It is an adjusting event under Ind AS 10 and makes the inflow virtually certain. So recognise a ₹12,00,000 asset in the year ended at the reporting date.

Exam tips

Always state the likelihood level in your first line. The marks are in the classification.
In a case scenario, quote the facts that decide the likelihood, such as legal advice or past experience.
For disclosure questions, list the items: description, estimate of financial effect, uncertainties and possible reimbursement.
Remember the asymmetry: liabilities are recognised when probable, assets only when virtually certain.
Always add one line on reassessment at the reporting date.

Practice questions from Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

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 contingent asset in Ind AS 37?

A contingent liability is a possible obligation, or a present obligation that is not recognised. A contingent asset is a possible asset that depends on uncertain future events. Neither is recognised in the balance sheet. The liability is disclosed unless remote, and the asset is disclosed only if an inflow is probable.

When is a contingent asset recognised under Ind AS 37?

It is recognised when the inflow is virtually certain. At that point the asset is no longer contingent. Recognise it in the period in which the change occurs. If the change is an adjusting event after the reporting period under Ind AS 10, recognise it in the earlier reporting period.

Do I disclose a contingent liability if the outflow is remote?

No. If the possibility of an outflow is remote, you neither recognise nor disclose the item. Disclosure applies when the outflow is possible.

Can a contingent liability become a provision?

Yes, but only if all three conditions are met at a reporting date. There must be a present obligation from a past event, an outflow must be probable, and a reliable estimate of the amount must be possible. If any one condition fails, the item stays a contingent liability, or is not reported at all if the outflow is remote.