Contingent assets: claims a client expects to win
When a client can recognise or disclose an insurance claim or lawsuit it expects to win under IAS 37, and when it must keep it out of the statements.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A client's warehouse floods in the last month of the financial year. The stock write-off goes into the statements straight away. The insurance claim, which the broker calls "a formality", does not, and the client cannot see why. Another client is suing a supplier over faulty goods, its lawyer is confident, and the director wants the expected award in this year's profit.
IAS 37 treats these hoped-for gains far more cautiously than the losses that come with them, and the preparer has to explain why.
Why gains wait when losses do not
Under IAS 37, a provision is recognised when it is probable that an outflow of resources will be required to settle it; where an outflow is not probable, the item is treated as a contingent liability. A contingent liability is not recognised, but it is disclosed unless the possibility of an outflow is remote. A probable loss therefore reaches the statement of financial position.
A possible gain does not. Under IAS 37, contingent assets are not recognised; they are disclosed when it is more likely than not that an inflow of benefits will occur. IAS 37 states that when the inflow is virtually certain, an asset is recognised in the statement of financial position, because it is no longer considered contingent.
The result is a deliberate asymmetry. Booking a gain that may never arrive would overstate the client's position, so the bar for assets is set far higher than the bar for liabilities.
Three levels of likelihood
| Likelihood of the inflow | Treatment under IAS 37 |
|---|---|
| Not more likely than not | Nothing in the statements |
| More likely than not, but short of virtually certain | Disclosed as a contingent asset |
| Virtually certain | Recognised as an asset; no longer contingent |
"Virtually certain" is a very high bar. A strong legal opinion, a supportive broker or a director's confidence does not meet it on its own.
Insurance claims after a loss event
Back to the flooded warehouse. The stock loss is recognised when it happens. The claim is assessed separately, stage by stage:
- Claim lodged, insurer silent. At most a disclosure, and only if the inflow is more likely than not.
- Insurer has accepted liability in writing, amount still being settled. The inflow may now be virtually certain for the part the insurer has accepted.
- Settlement agreed and confirmed before year end. A receivable, and not a contingent asset at all.
Keep the evidence for each stage: the policy terms and excess, the insurer's correspondence and the assessor's report. Assess the loss and the claim separately rather than netting them, so the reader sees the full write-off and, when it qualifies, the recovery.
A favourable judgment after year end
Suppose the case against the supplier is decided in the client's favour after year end but before the statements are authorised for issue. ACCA explains that IAS 10 requires the result of a court case decided after the reporting date to be taken into account in determining whether a provision should be recognised at year end under IAS 37.
ACCA's explanation concerns provisions, where the judgment confirms an obligation that existed at year end. For a client that wins, the judgment is new evidence about the likelihood of the inflow. Assess it against IAS 37's thresholds and IAS 10's rules on adjusting events, and take account of any right of appeal and whether the other side can actually pay. The liability side of the same situation is covered in a court case settled after year end.
Completing the note the trial balance cannot fill
In Achekam's Financials Studio, the draft set is built from the mapped trial balance with every figure calculated in code, including the directors' report, the primary statements, the policies and the notes. The practitioner's report follows the level the firm chooses: audit, independent review, compilation or none.
A contingent asset is, by definition, not in the trial balance, so no mapped figure will ever produce its note. The Studio's standard policy wording is based on IFRS for SMEs and labelled for review before issue, staff can write their own, and notes leave facts the trial balance does not hold as "[to be completed]".
The contingent assets disclosure is therefore the preparer's work from start to finish:
- Ask the client directly, every year: are there claims, lawsuits or insurance recoveries in your favour?
- For each one, gather the evidence and assess the likelihood against the three levels above.
- Draft the note in plain words, describing the nature of the claim and taking care not to suggest the outcome is more certain than it is.
- Review it alongside the contingent liabilities note, so the two read consistently.
More on the liability side is in provisions and contingent liabilities.
The IFRS Foundation's summary of IAS 37 explains how provisions, contingent liabilities and contingent assets are defined and accounted for, and what must be disclosed about them.
Explaining it to the client
Most directors accept the rule once it is framed as protection rather than pessimism: the statements will show the claim the day it becomes as good as cash, and not a day before. Until then, a carefully worded note tells readers the claim exists without promising what nobody can yet promise.
It also helps to point out the reverse risk. A gain booked too early and then lost has to be reversed in a later year, in full view of the bank and the tax authority, and often at the worst moment. Waiting for virtual certainty spares the client that embarrassment and keeps the statements credible with the people who read them.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
