Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Contingent Liabilities and Contingent Assets under AS 29 (Revised)

Updated 4 October 2026 · Fact-checked

Under AS 29, a contingent liability is a possible or unmeasurable obligation. You do not recognise it; you disclose it in the notes unless the outflow is remote. A contingent asset is a possible inflow. You neither recognise it nor disclose it in the financial statements. If an inflow is probable, you describe it in the Directors' report. Review both at each balance sheet date.

Understand Contingent Liabilities and Contingent Assets

A contingent liability is either a possible obligation whose existence depends on a future uncertain event outside the entity's control, or a present obligation that is not recognised because an outflow is not probable or the amount cannot be measured reliably. Example: a lawsuit filed against you where your lawyer thinks losing is less likely than winning.

A contingent asset is a possible asset arising from past events, whose existence will be confirmed only by an uncertain future event not wholly in your control. Example: a claim you have filed against an insurer or a customer, still undecided.

The treatment is deliberately lopsided because of prudence. A contingent liability is not recognised in the books, but it is disclosed in the notes so readers are warned, unless the chance of outflow is remote. A contingent asset is not recognised at all, because recognising it could book income that may never be realised. It is also not disclosed in the financial statements. Where an inflow of economic benefits is probable, it is described in the report of the approving authority (for a company, the Board's/Directors' report), not in the notes.

Contingencies change over time, so you reassess them at every balance sheet date. If an outflow later becomes probable and can be estimated reliably, you recognise a provision in the period of the change. If an inflow becomes virtually certain, the asset is no longer contingent and you recognise it in the period of the change.

There is one link to AS 4. If the change comes from information received after the balance sheet date but before the accounts are approved, and that information gives evidence of a condition that existed at the balance sheet date, it is an adjusting event. You then recognise the provision or asset in the year just ended, not in the later period.

Think of three zones for outflows: probable (provide), possible but not probable (disclose as contingent liability), remote (ignore). For inflows: virtually certain (recognise the asset), probable (describe in the Directors' report, not in the financial statements), anything less (say nothing).

Key rules to remember

Contingent liability treatment: Not recognised; disclose in notes unless the possibility of outflow is remote; Disclose a brief description, an estimate of financial effect, the uncertainties about amount or timing, and the possibility of any reimbursement, where practicable.
Contingent asset treatment: Never recognised; not disclosed in the financial statements; if inflow is probable, describe in the Directors' report; The description in the Directors' report is brief and, where practicable, includes an estimate of financial effect.
Outflow decision ladder: Probable and reliably estimable → provision; possible (not probable) or not measurable → disclose; remote → no disclosure; Probable means more likely than not. Remote means the chance is very small.
Inflow decision ladder: Virtually certain → recognise asset; probable → describe in Directors' report; otherwise → nothing; Virtually certain inflow means the asset is not a contingent asset any more.
Reassessment rule: Review contingencies at each balance sheet date; change treatment in the period the probability changes, unless AS 4 makes the later event an adjusting event; A change in probability in a later period is a change in estimate, and earlier periods are not restated. Exception: new information after the balance sheet date but before approval of the accounts that gives evidence of conditions existing at the balance sheet date is an adjusting event under AS 4, so the year just ended is adjusted.

How to solve Contingent Liabilities and Contingent Assets questions

Use this sequence for any question on contingent items. It forces you to classify before you decide the treatment.

1Identify whether the item is an outflow (liability, claim against the entity) or an inflow (claim by the entity, expected gain).
2Check whether a present obligation exists at the balance sheet date from a past event. If yes, move to the probability test. If only possible, it is a contingent liability.
3For outflows, grade the likelihood: probable, possible but not probable, or remote. Check also whether the amount can be reliably measured.
4Apply the treatment: probable and measurable gives a provision with a journal entry; possible or unmeasurable gives a note; remote gives nothing.
5For inflows, grade the likelihood: virtually certain, probable or less. Recognise only when virtually certain; describe in the Directors' report when probable; otherwise ignore.
6Check for later events. If the grade has changed since last year, recognise or stop disclosing in the current period. But if the event happens after the year end and before the accounts are approved, and it gives evidence of a condition existing at the balance sheet date, it is an adjusting event under AS 4, so adjust the year just ended.
7Write the answer with the reason in one line, quoting the AS 29 criterion, then show the disclosure wording or journal entry.

Quickest way: Three-box sort for MCQs and short answers

When to use it: Use it when you have under two minutes per mark, such as MCQs and 2-4 mark written parts.

Underline the probability words in the question: probable, likely, possible, remote, virtually certain.
Contingent asset: only 'virtually certain' leads to recognition. 'Probable' leads to a mention in the Directors' report, not a note. Everything else leads to no entry and no mention.
Contingent liability: 'probable' with a reliable estimate leads to a provision. 'Possible' leads to a note. 'Remote' leads to nothing.
In MCQs, eliminate any option that recognises a contingent asset in the profit and loss or balance sheet, or discloses it in the notes.
In written answers, use a three-part format: Provision (facts) - AS 29 rule - Conclusion with treatment. This earns step marks even if the final figure is off.

Common mistakes in Contingent Liabilities and Contingent Assets

Recognising a contingent asset as income because the claim looks strong.
Students treat 'probable' as good enough for recognition, as with provisions.
Fix: Recognition of an asset needs virtual certainty. Probable only earns a description in the Directors' report, not recognition and not a note.
Disclosing a contingent liability even when the outflow is remote.
Students believe every contingent item must be mentioned.
Fix: Remote means no disclosure. Disclose only if the possibility of outflow is not remote.
Providing for a legal claim that is only possible.
Students are cautious and book every claim as a liability.
Fix: A provision needs a present obligation, a probable outflow and a reliable estimate. Possible claims go to the notes.
Ignoring a probable outflow just because the exact amount is unknown.
Students confuse 'no precise amount' with 'no reliable estimate'.
Fix: A reliable estimate usually exists, even as a range. Only in extremely rare cases is it not possible, and then it is a contingent liability.
Restating prior years when a contingent item becomes a provision, or ignoring AS 4 when the news arrives after the year end.
Students either link every change to prior period adjustments, or treat every change as a current-period change without checking the date and nature of the event.
Fix: A change in probability in a later period is a change in estimate and is recognised in that period. But if information arrives after the balance sheet date and before approval of the accounts, and it gives evidence of conditions existing at the balance sheet date, it is an adjusting event under AS 4. Then you adjust the year just ended.
Calling a recognised provision a contingent liability.
Students mix the two terms because both involve uncertainty.
Fix: A provision is a recognised liability of uncertain timing or amount. A contingent liability is not recognised.

Worked examples

Example 1

At the balance sheet date, a customer has filed a suit against Alpha Ltd claiming ₹8,00,000 for alleged defects. Alpha's lawyers advise that the claim is unlikely to succeed, but a loss cannot be called remote. How should Alpha treat it in its financial statements?

Show the solution

The suit arises from a past event, but whether Alpha has an obligation depends on the court's decision. It is a possible obligation.
Outflow is not probable, as lawyers think the claim is unlikely to succeed. So no provision is made.
The outflow is not remote either. So the item must be disclosed.
Disclose as a contingent liability: nature of the claim, estimated financial effect of ₹8,00,000, and the uncertainty about outcome and timing.

Answer: No provision. Disclose a contingent liability of ₹8,00,000 in the notes.

Example 2

Beta Ltd filed an insurance claim of ₹5,00,000 for fire damage that occurred before the year end. At the year end the insurer has not accepted the claim, but Beta's advisers believe acceptance is probable. After the year end, before the accounts are approved, the insurer confirms in writing that it will pay the full amount. Give the treatment in each situation.

Show the solution

At the year end, the claim is a possible asset confirmed only by the insurer's decision. It is a contingent asset.
On the facts known at the year end, inflow is probable but not virtually certain. So do not recognise any asset or income.
A contingent asset is not disclosed in the financial statements, so there is no note. Because the inflow is probable, it would be mentioned briefly in the Board's/Directors' report, with an estimate of ₹5,00,000 where practicable.
The insurer's confirmation is received before the accounts are approved. It gives evidence of a claim that existed at the balance sheet date, since the fire happened before the year end. Under AS 4 this is an adjusting event.
So the inflow is now virtually certain and the asset is no longer contingent. Recognise the ₹5,00,000 asset and income in the year just ended, not in the next year. The Directors' report mention is then not needed for this item.
If the confirmation had related to a condition arising only after the year end, it would not be adjusting. Recognition would then fall in the period in which realisation becomes virtually certain.

Answer: On year-end facts alone: no recognition and no disclosure in the notes; the probable inflow of ₹5,00,000 would be mentioned in the Board's/Directors' report. Because the insurer's confirmation before approval of the accounts is an adjusting event under AS 4, recognise the ₹5,00,000 asset and income in the year just ended.

Exam tips

Always state the probability grade in your answer. The grade decides the treatment and carries the marks.
Learn the asymmetry cold: liabilities are disclosed in the notes when not remote; assets are never recognised, never noted, and only described in the Directors' report when probable.
In multi-part questions, treat each claim separately. One may be a provision, another a disclosure and another ignored.
Where a question gives a range of outcomes, check whether a reliable estimate exists. If so, a probable outflow becomes a provision.
Pair this topic with AS 4: past questions often ask about a claim settled after the year end, so decide whether it is an adjusting event.

Practice questions from AS 29 (Revised) 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 main difference between a contingent liability and a contingent asset under AS 29?

A contingent liability is a possible or unmeasurable obligation that is disclosed in the notes unless the outflow is remote. A contingent asset is a possible inflow that is never recognised and not disclosed in the financial statements. If the inflow is probable, it is described in the Directors' report.

Can a contingent asset be recognised in the financial statements?

No, not while it is contingent. If realisation of income becomes virtually certain, the related asset is not a contingent asset any more, and it is recognised. This is normally in the period of that change. If the news comes after the year end but before approval and evidences a condition existing at the balance sheet date, AS 4 makes it an adjusting event and you recognise it in the year just ended.

What happens if the possibility of an outflow is remote?

You neither recognise nor disclose it. AS 29 requires disclosure of contingent liabilities only when the possibility of outflow is not remote.

How often should contingent items be reviewed?

At each balance sheet date. If an outflow becomes probable and can be estimated reliably, a provision is recognised in that period. If an inflow becomes virtually certain, the asset is recognised in that period. The exception is an adjusting event under AS 4, where the year just ended is adjusted.