A contingent asset, such as a legal claim the business expects to win or an insurance claim not yet agreed, is never recognised on the balance sheet under FRS 102 paragraph 21.13. It is disclosed in the notes when an inflow is probable, and it stops being contingent and goes on the balance sheet only once the inflow is virtually certain.
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What exactly is a contingent asset?
The FRS 102 glossary defines a contingent asset as a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the entity. Two features drive the definition. First, something has already happened: a supplier delivered faulty goods, a fire damaged stock, a customer broke a contract. Second, whether the business actually ends up with anything depends on events it cannot control, such as a court ruling, an insurer’s decision or a counterparty agreeing to pay.
Typical examples in smaller companies and practices are:
- a claim for damages against a supplier, contractor or former adviser;
- an insurance claim for property damage or business interruption that the insurer has not yet accepted or quantified;
- a disputed refund, such as an overpayment a supplier denies;
- a counterclaim made in response to a claim against the business.
Section 21 of FRS 102 covers contingent assets alongside provisions and contingent liabilities. The mirror image on the liability side is explained in FRS 102 Section 21: provisions and contingencies; this page looks only at the asset side.
Why can a likely win not be booked as income?
Paragraph 21.13 says plainly that an entity shall not recognise a contingent asset as an asset. The threshold for the asset side is deliberately higher than for liabilities. A provision is recognised when an outflow is probable, which FRS 102 defines as more likely than not (paragraph 21.4). A contingent asset is recognised only when the inflow is virtually certain, and at that point the standard says it is no longer a contingent asset at all.
FRS 102 paragraph 2.17 explains prudence as caution when making judgements under uncertainty, so that assets and income are not overstated and liabilities and expenses are not understated. It adds that prudence does not imply a general need for asymmetry, although particular sections may contain asymmetric requirements. Section 21 is one of those sections: a probable loss is recognised, a probable gain is only disclosed.
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When does the claim become an asset that can be recognised?
Paragraph 21.13 states that when the flow of future economic benefits is virtually certain, the related asset is not a contingent asset and its recognition is appropriate. FRS 102 does not give a percentage for virtually certain, so the test is about evidence rather than odds. Evidence that tends to support recognition includes:
- a signed settlement agreement with a solvent counterparty;
- a court judgment for a stated sum, with the appeal period expired or no appeal made;
- written acceptance of an insurance claim by the insurer with the amount agreed.
Evidence that usually does not support recognition includes a solicitor’s opinion that the case is strong, a letter before action, an insurer’s acknowledgement of a claim without acceptance of liability, or a loss adjuster’s report that has not been agreed. Those may make the inflow probable, which triggers disclosure, but probable is not virtually certain.
What must the notes say about a contingent asset?
Paragraph 21.16 requires disclosure where an inflow of economic benefits is probable (more likely than not) but not virtually certain. The note should give:
- a description of the nature of the contingent assets at the end of the reporting period; and
- when practicable, an estimate of their financial effect, measured using the principles in paragraphs 21.7 to 21.11.
If it is impracticable to give that information, that fact must be stated. Where the inflow is possible but not probable, no disclosure is required.
Paragraph 21.17 deals with the extremely rare case where disclosure could seriously prejudice the entity’s position in a dispute. The entity may then withhold the detail, but must still disclose the general nature of the dispute, together with the fact that, and reason why, the paragraph 21.16 information has not been given.
Small entities are not exempt. Paragraph 1AC.31C requires a small entity using Section 1A to give the provisions and contingencies disclosures in paragraphs 21.14 to 21.17A, which includes paragraph 21.16. See FRS 102 Section 1A for small entities for the wider disclosure set. Micro entities using FRS 105 are subject to the same recognition rule in paragraph 16.18: no contingent asset is recognised unless the inflow is virtually certain.
How do insurance recoveries interact with provisions and damaged assets?
Insurance is the most common source of confusion, because the recovery often sits next to a loss that is recognised.
Insurance against a provision
Where a business recognises a provision, for example for a claim by a customer, and expects its insurer to reimburse some or all of it, paragraph 21.9 applies. The reimbursement is recognised as a separate asset only when it is virtually certain that it will be received on settlement. The amount recognised cannot exceed the provision, and the receivable must be shown as an asset, not netted against the provision. The expense in the profit and loss account may be presented net of the reimbursement. Further detail on claims against the business is in legal claims: provision or contingent liability.
Compensation for damaged or lost assets
Paragraph 17.25 says compensation from third parties for property, plant and equipment that was impaired, lost or given up is included in profit or loss only when the compensation is virtually certain. The write down of the damaged asset is dealt with separately under the impairment rules, so the loss and the recovery can fall into different periods. The guide to impairment of assets under Section 27 covers the write down side.
What happens if the claim is settled after the year end?
Section 32 deals with events between the reporting date and the date the accounts are authorised for issue. Paragraph 32.7(b) gives, as an example of a non adjusting event, an amount that becomes receivable as a result of a favourable judgement or settlement of a court case after the reporting date. That amount was a contingent asset at the reporting date, so it is not recognised in the year being reported on, although paragraph 21.16 disclosure may be needed.
The same paragraph notes an exception: where a judgement was reached before the reporting date but the damages could not be measured reliably, agreement on the amount after the year end may be an adjusting event. The detail is in events after the reporting period.
How might this look in practice?
Illustration only. A company with a 31 December year end has two open claims.
| Claim | Position at 31 December | Treatment |
|---|---|---|
| Flood damage to stock, insured | Insurer has confirmed cover in writing and agreed to pay £40,000 | Virtually certain: recognise a £40,000 receivable and income |
| Damages claim against a contractor | Proceedings issued; solicitors advise success is more likely than not, estimate £60,000 | Probable but not virtually certain: no asset, disclose nature and estimated effect |
If the contractor then settles for £55,000 in February, before the directors approve the accounts, the year end treatment does not change. The settlement is a non adjusting event, and the note can be updated to explain it. The £55,000 is recognised in the following year.
Had the insurer only acknowledged the flood claim and appointed a loss adjuster by 31 December, the stock write down would still be recognised in the year, but the recovery would be a contingent asset. If recovery was probable, it would be disclosed rather than recognised.
Do IFRS reporters and acquirers follow the same rule?
IAS 37, the international equivalent, takes the same approach. The IFRS Foundation summary states that contingent assets are not recognised but are disclosed when an inflow is more likely than not, and that when the inflow is virtually certain an asset is recognised because it is no longer considered contingent.
Business combinations have their own rule. FRS 102 paragraph 19.15 says the acquirer shall not recognise a contingent asset at the acquisition date, even though certain contingent liabilities of the acquired business are recognised.
What mistakes come up most often?
- Booking the claim on a lawyer’s optimism. A strong case is not virtually certain. The asset should wait for a settlement, final judgment or agreed insurance claim.
- Netting an insurance recovery against a provision. Paragraph 21.9 requires a separate asset, capped at the provision, and only when virtually certain.
- Treating a post year end settlement as adjusting. Paragraph 32.7(b) treats it as non adjusting unless judgement was already given before the year end.
- Leaving out the note. A probable claim needs a description and, when practicable, an estimate, including in small company accounts.
- Forgetting the tax link. Under section 46 of the Corporation Tax Act 2009, trading profits are calculated in accordance with generally accepted accounting practice, subject to adjustments required or authorised by law, so the timing of recognition in the accounts generally drives the timing of a taxable trading receipt.
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Related Accountapedia entries
- Contingent fees for tax work
- Revenue recognised over time for contracts
- Legal claims: provision or contingent liability
- SDLT on overage and contingent payments
- Accounting for earn outs and contingent consideration
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- Financial Reporting Council: FRS 105 September 2024
- IFRS Foundation: Ias 37 provisions contingent liabilities and contingent assets
- GOV.UK: Manual page BIM46530
- legislation.gov.uk: Act 2009 c. 4, section 46
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.