Corporate Accounting and Auditing · Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)

Contingent Liability and Contingent Asset under Ind AS 37

Updated 10 October 2026 · Fact-checked

A contingent liability is a possible obligation, or a present obligation that is not recognised, arising from past events. A contingent asset is a possible asset of the same kind. Neither is recognised in the balance sheet. Contingent liabilities are disclosed unless the outflow is remote. Contingent assets are disclosed only when an inflow is probable.

Understand Contingent Liabilities and Contingent Assets

Start with the idea of uncertainty. Many events leave a business unsure of what will happen: a court case is pending, a guarantee has been given, a customer has been sued. Ind AS 37 sets rules for how much of this uncertainty goes into the financial statements.

A provision is a liability of uncertain timing or amount. It is recognised because there is a present obligation, an outflow is probable and a reliable estimate can be made. A contingent liability fails one of these tests. Either it is only a possible obligation whose existence depends on a future uncertain event outside the entity's control, or it is a present obligation that is not recognised because an outflow is not probable or the amount cannot be measured reliably.

A contingent asset is a possible asset arising from past events, whose existence will be confirmed only by uncertain future events not wholly in the entity's control. A typical case is a claim you have filed against another party that is still undecided.

The treatment is deliberately asymmetric. Contingent liabilities are not recognised, but they are disclosed unless the possibility of outflow is remote. Contingent assets are not recognised either, and they are disclosed only when an inflow of economic benefits is probable. This follows prudence: you should not book a gain early. But when the inflow becomes virtually certain, the asset is no longer contingent. It is a normal asset and is recognised in the period of the change.

All of these items are reassessed at every reporting date. A contingent liability can become a provision when an outflow becomes probable. A contingent asset can become a recognised asset when the inflow becomes virtually certain.

Key rules to remember

Provision recognition test: Present obligation from a past event + outflow probable + reliable estimate possible → recognise a provision; All three conditions must be met. If any one fails, you have a contingent liability (or nothing).
Contingent liability treatment: Not recognised; disclose unless the possibility of outflow is remote; Disclose a brief description, an estimate of financial effect, indications of uncertainties and the possibility of any reimbursement, where practicable.
Contingent asset treatment: Not recognised; disclose only if inflow of economic benefits is probable; If no inflow is probable, no disclosure is needed.
Recognition of an asset: Inflow virtually certain → not a contingent asset → recognise the asset; Virtually certain is a much higher bar than probable.
Probability ladder: Virtually certain > Probable (more likely than not) > Possible > Remote; A provision needs a probable outflow, plus a present obligation and a reliable estimate. A contingent liability is disclosed unless the outflow is remote. Contingent asset disclosure needs a probable inflow.
Reassessment: Review provisions, contingent liabilities and contingent assets at each reporting date; Status can change from one category to another between periods.

How to solve Contingent Liabilities and Contingent Assets questions

Use this sequence for any question that asks you to classify, account for or disclose an uncertain item.

1Identify the past event that gives rise to the item, such as a lawsuit filed, a guarantee given or a claim lodged.
2Decide whether it is a liability side or an asset side item. This fixes which rules apply.
3For a liability, ask if a present obligation exists. If the existence depends on a future uncertain event, it is a possible obligation and so a contingent liability.
4If a present obligation exists, check probability of outflow and reliable estimate. If both pass, recognise a provision. If either fails, it is a contingent liability.
5For a contingent liability, check if outflow is remote. If remote, no disclosure. Otherwise disclose with description and estimated amount.
6For an asset, check the inflow. Virtually certain means recognise the asset. Probable means disclose only. Less than probable means nothing.
7Write the journal entry if a provision or asset is recognised. For a contingent item, state clearly that no entry is passed and give the note.
8Conclude with the disclosure wording or the accounting entry and the reason in one line.

Quickest way: Probability and obligation grid

When to use it: Use it for MCQs and short classification questions where you need the answer in under a minute.

Liability: present obligation and probable outflow and reliable estimate? Provision. Otherwise contingent liability.
Contingent liability: remote? No disclosure. Otherwise disclose.
Asset: virtually certain? Recognise. Probable? Disclose. Otherwise ignore.
Remember that a contingent item never gets a journal entry or a balance sheet figure.

Common mistakes in Contingent Liabilities and Contingent Assets

Recognising a contingent asset because a favourable court judgment looks likely.
Students treat probable and virtually certain as the same thing.
Fix: Recognise only when the inflow is virtually certain. Probable means disclosure in notes only.
Disclosing every contingent liability, including remote ones.
Students remember that contingent liabilities are disclosed and miss the exception.
Fix: Check the remote test first. If outflow is remote, no disclosure is required.
Creating a provision for a possible obligation.
The word possible is confused with probable.
Fix: A provision needs a present obligation and a probable outflow. A possible obligation is only a contingent liability.
Passing a journal entry for a contingent liability.
Students want every item to appear in the books.
Fix: Contingent liabilities and assets are only disclosed in notes. Write that no entry is passed.
Forgetting to reassess at the next reporting date.
Students treat classification as permanent.
Fix: State that status is reviewed each period. A contingent liability becomes a provision when outflow becomes probable.
Leaving out the amount or description in the disclosure note.
Students write only the heading Contingent Liabilities.
Fix: Give a brief nature, an estimate of financial effect where practicable, uncertainties and any possible reimbursement.

Worked examples

Example 1

A Ltd is defendant in a suit for damages of ₹8,00,000 filed by a customer. Its lawyers advise that the company will probably not lose the case, but a loss cannot be called remote. How should A Ltd treat this at the reporting date?

Show the solution

Past event: the alleged breach that led to the suit.
Present obligation: the lawyers' advice is that the company will probably not lose, so an outflow is not probable.
Provision test fails because the outflow is not probable.
So the item is a contingent liability.
Loss is not remote, so disclosure is required.
No journal entry is passed.

Answer: Do not provide for ₹8,00,000. Disclose it in the notes as a contingent liability, with a brief description of the case, the estimated amount of ₹8,00,000 and the uncertainty about the outcome.

Example 2

B Ltd has filed a claim of ₹5,00,000 against a supplier for defective goods. In the first year, the claim is pending and the chance of success is considered probable. In the next year, the supplier admits liability in writing and the court issues an order in favour of B Ltd, which the supplier cannot appeal. How is the claim treated in each year?

Show the solution

First year: this is a possible asset arising from a past event, confirmed only by a future outcome, so it is a contingent asset.
Inflow is probable but not virtually certain, so do not recognise it.
Disclosure is required because the inflow is probable. Give a brief description and estimate of the financial effect of ₹5,00,000.
Next year: the order cannot be appealed, so the inflow is virtually certain.
The asset is no longer contingent. Recognise it in the period when the change occurs.
Entry: Dr Claim Receivable ₹5,00,000; Cr Other Income (Claim Income) ₹5,00,000. If the claim recovers a loss already charged to an expense account, credit that expense account instead.

Answer: First year: no entry, disclose a contingent asset of ₹5,00,000 in the notes. Next year: pass the entry Dr Claim Receivable ₹5,00,000, Cr Other Income (Claim Income) ₹5,00,000 (or credit the relevant expense account if it is a recovery of a loss).

Exam tips

In theory answers, always state both parts of the contrast: contingent liability is disclosed unless remote, contingent asset is disclosed only if probable.
For MCQs, look for the words virtually certain, probable, possible and remote. They decide the answer.
In practical questions, write that no journal entry is passed for contingent items. Examiners give a step mark for this.
When a question gives lawyer's advice, link the advice to the probability test before concluding.
Learn the difference table in points: nature, recognition, disclosure and reassessment.

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

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 where a present obligation exists, outflow is probable and the amount can be estimated reliably. A contingent liability fails at least one of these tests and is only disclosed. A provision appears in the balance sheet, a contingent liability appears in the notes.

When is a contingent asset recognised?

A contingent asset is recognised when realisation of the inflow becomes virtually certain. At that point it is no longer a contingent asset. If the inflow is only probable, you disclose it in the notes and do not recognise it.

Is a contingent liability always disclosed under Ind AS 37?

No. Disclosure is required unless the possibility of an outflow is remote. If the outflow is remote, no disclosure is needed.

Do contingent liabilities need a journal entry?

No. Neither contingent liabilities nor contingent assets are recognised in the financial statements. They are only described in the notes where disclosure is required.