Assets and liabilities management ppt

Contingent assets and contingent liabilities and what is a contingent liability in accounting
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Dr.DinoHardy,United Arab Emirates,Teacher
Published Date:25-07-2017
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CPT Section A Fundamentals Of Accounting Chapter 2 Unit 7 CA.V.K.Jain After studying this you will be able to: Understand – “contingent assets” and “contingent liabilities” Distinguish “contingent liabilities” with “liabilities” and “ provisions” Possible assets arises from past events. Their existence will be confirmed only after occurrence or non occurrence of some events. The events are uncertain and not within the control of enterprise. It usually arises from unplanned or unexpected events that give rise to possibility of an inflow of economic benefits. For example a claim lodged against a party through legal process and verdict of which is still awaited. Where outcome is uncertain, is a contingent asset. No recognition in Financial Statements - Prudence / Conservative Principle. No disclosure of Contingent Assets in Financial Statements. Usually disclosed in report of approving authority ,if inflow of economic benefit is probable. When realisation is virtually certain, then no longer remains as Contingent Asset. Assets and incomes are recognised in Financial Statements in the year which the change occurs. Usually arises from unplanned or unexpected events. Possible obligation arises from past events, existence of which will be confirmed only by occurrence or non- occurrence of one or more uncertain future event not within the control of enterprise; or Present obligation that arises from past events but is not recognised because: (1) It is not probable that an outflow will be required to settle the obligation. (2) A reliable estimate of the amount of obligation can not be made. No recognition of contingent liability. Disclosure by way of a note to the balance sheet. When recognised: if it becomes probable, a provision is recognised in Financial Statements of the period in which change probably occurs except in the extremely circumstances where no reliable estimate can be made. Claims against the company not acknowledged as debts Bills discounted but not yet matured Arrears of dividends on cumulative preference shares Guarantee given in respect of third parties Statutory liability under dispute Uncalled liability on investments in partly paid shares Estimated amount of contracts remaining to be executed on capital account and not provided for Basis of distinction Contingent liability Other liability Meaning May or may not arise Present obligation arising Depends on uncertain from past event event Dependence of Uncertain future events Already occurred occurrence Certainty of outflow No certain certain of resources Recognition Not recognised in financial Recognised in financial statements statements Disclosure By way of a foot note to Liabilities side Of Balance Balance Sheet Sheet Examples Bills discounted but not Creditors for goods matured supplied Arrears of dividend Outstanding expenses Meaning As per schedule VI Amount written off or retained by way of providing for depreciation , renewal or diminution in the value of assets or retained by way of providing for any known liability , of which the amount can not be determined with substantial accuracy. As per AS 29 A provision is a liability which can be measured only by using a substantial degree of estimation. When: Present obligation as a result of past event. It is probable that outflow of resources will be required to settle the obligation. A reliable estimate can be made in terms of amount of the obligation. Basis of distinction Contingent liability Provision Meaning Possible obligation which Present liability of may or may not arise uncertain amount . Can be measured reliably Recognition criteria Fails to meet this criteria Meets this criteria Conditions for Includes present Present obligations that recognition obligations that don't meet meet recognition criteria . recognition criteria . Probable outflow and Probable outflow or reliable estimate be made. amount cannot be reliably estimated. Judgment of If management estimates If management estimates management less likely outflow, it probable outflow, it discloses obligation as a recognises a provision in contingent liability Balance Sheet The value added tax officer imposes a penalty for violation of a provision in the value added tax act. The company files an appeal. If management estimates that it is probable that company will have to pay the penalty , it recognises a provision for the liability . On the other hand, if management anticipates that the judgment of appellate authority will be in it’s favor and it is less likely that company will have to pay penalty , it will disclose the obligation as a contingent liability instead of recognising a provision for the same. Nature of obligation / Present obligation Possible obligation situation Probable outflow and Recognise as Provision Disclose as a reliable estimate Contingent Liability Probable outflow and no Disclose as a Disclose as a reliable estimate Contingent Liability Contingent Liability No probable outflow / Disclose as a Do nothing liability and no reliable Contingent Liability estimate Multiple Choice Questions (a) The possibility of an inflow of economic benefits to the business entity (b) The possibility of an outflow of economic benefits to the business entity ( c) Either (a) or (b) (d) none of the above Right Answer : A The possibility of an inflow of economic benefits to the business entity (b) The possibility of an outflow of economic benefits to the business entity ( c) Either (a) or (b) (d) none of the above Right Answer : B (a) In the financial statements (b) In the report of the approving authority (Board of Directors in the case of a company ,and the corresponding approving authority in the case of any other enterprises) ( c) In the cash flow statement (d) none of the above Right Answer : B (a) Liability (b) Provision (c) Contingent liability (d) Contingent Assets Right Answer: B (a) Liability (b) Provision (c) Contingent liabilities (d) Contingent Assets Right Answer: C (a) Recognised (b) Not recognised (c) Adjusted (d) None of the above Right Answer: B

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