Contingent liabilities and contingent assets

Lawsuits, guarantees, tax disputes and environmental claims often sit in the notes rather than on the balance sheet. The line between a provision, a disclosed contingent liability and nothing at all depends on probability. This guide sets out the thresholds and works through a lawsuit at different stages.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 4 minute read.

Short answer

Under IAS 37, contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events, or present obligations where an outflow is not probable or cannot be measured reliably. They are not recognised but are disclosed, unless an outflow is remote. Contingent assets are possible assets from past events; they are disclosed when an inflow is probable and recognised only when it is virtually certain, at which point they are no longer contingent.

At a glance

Probable outflow
Provision
Possible outflow
Disclose contingent liability
Remote
Nothing
Contingent asset, probable
Disclose
Virtually certain inflow
Recognise an asset
Reassessed
Continually
Contingent liabilities and contingent assetsProbable outflow: Provision; Possible outflow: Disclose contingent liability; Remote: Nothing; Contingent asset, probable: Disclose; Virtually certain inflow: Recognise an asset; Reassessed: Continually.KEY FACTS AT A GLANCEContingent liabilities and contingent assetsProbable outflowProvisionPossible outflowDisclose contingentliabilityRemoteNothingContingent asset, probableDiscloseVirtually certain inflowRecognise an assetReassessedContinuallyTax BakersContingent liabilities and contingent assetsProbable outflow: Provision; Possible outflow: Disclose contingent liability; Remote: Nothing; Contingent asset, probable: Disclose; Virtually certain inflow: Recognise an asset; Reassessed: Continually.KEY FACTS AT A GLANCEContingent liabilities andcontingent assetsProbable outflowProvisionPossible outflowDisclose contingent liabilityRemoteNothingContingent asset, probableDiscloseVirtually certain inflowRecognise an assetReassessedContinuallyTax Bakers
Key facts at a glance, as set out in this guide.

How do the probability thresholds work?

Liabilities and assets by likelihoodLiabilities and assets by likelihoodLiabilityAssetVirtuallycertainProvisionRecogniseProbableProvisionDisclosePossibleDiscloseNothingRemoteNothingNothing
Liabilities are recognised at probable; assets only at virtually certain.

The thresholds are applied to each obligation separately, except for large groups of similar obligations, such as product warranties, where the class as a whole is assessed. Probable means more likely than not. Possible covers outcomes that are less likely than not but more than remote. Virtually certain is close to certainty. IAS 37 treats liabilities and assets asymmetrically: a liability is recognised at probable, an asset only at virtually certain, reflecting caution about recognising income that may never be realised.

A worked example: a lawsuit

A customer sues a company for 1,000,000 over a defective product. The company's lawyers assess the case at each reporting date.

Lawyers' assessmentAccounting
Year 1: about 30% chance of losing, likely damages 600,000 if lostContingent liability: disclose the nature, an estimate of 600,000 and the uncertainties. No provision.
Year 2: after new evidence, 65% chance of losing, most likely award 600,000Provision of 600,000, the most likely outcome for a single obligation. Disclose the provision.
After year 2 ends, before the accounts are approved: court awards 700,000Adjusting event under IAS 10: provision increased to 700,000.

The company has also counter-claimed against its supplier. While a recovery is probable but not virtually certain, it is disclosed as a contingent asset; it is recognised only when the supplier agrees to pay or a court orders it and collection is assured.

What must be disclosed for contingent liabilities?

  • A brief description of the nature of the contingent liability.
  • Where practicable, an estimate of its financial effect.
  • An indication of the uncertainties about the amount or timing of any outflow.
  • The possibility of any reimbursement.

In extremely rare cases, where disclosure would seriously prejudice the company's position in a dispute, it may disclose only the general nature of the dispute and why the details have not been given.

What about events after the reporting date?

A court ruling, settlement or new evidence after the year end but before the accounts are approved is an adjusting event if it gives evidence about conditions at the reporting date, as in the lawsuit above. A claim arising from an event after the year end, such as an accident in January, is non-adjusting and disclosed if material.

What does a contingent liability note look like?

An example: "A customer has brought a claim against the company alleging that a product supplied in 2025 was defective, seeking damages of CU 1.0 million. The company is defending the claim. Based on legal advice, the directors consider that the claim is unlikely to succeed and no provision has been recognised. If the claim were successful, the directors estimate that damages of about CU 0.6 million could be payable."

Common mistakes

  • Disclosing nothing because a provision is not required, when an outflow is possible and not remote.
  • Recognising a probable insurance recovery as an asset before it is virtually certain.
  • Describing every claim as remote without evidence from legal advisers.
  • Forgetting to reassess at each reporting date: a claim that was possible last year may now be probable, or may have become remote.

Common contingent liabilities

SituationUsually
Guarantee of another company's loan, default unlikely (see financial guarantee contracts)Financial guarantee under IFRS 9 for the issuer; contingent liability disclosure for others
Joint and several liability for a joint arrangement's debtsProvision for the expected share; contingent liability for the rest
Regulatory investigation at an early stageContingent liability, or nothing if remote
Tax dispute on income taxesIFRIC 23, not IAS 37

Are contingent liabilities ever recognised?

Yes, in a business combination. IFRS 3 requires the acquirer to recognise a contingent liability of the acquired business at fair value if it is a present obligation that can be measured reliably, even if an outflow is not probable. See purchase price allocation, IAS 37 explained and IFRIC 23.

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Questions people ask

What is a contingent liability under IAS 37?

A possible obligation depending on uncertain future events, or a present obligation where an outflow is not probable or cannot be measured reliably. It is disclosed, not recognised, unless remote.

When is a contingent asset recognised?

Only when an inflow is virtually certain; it is then no longer contingent. A probable inflow is disclosed.

Should a lawsuit be provided for or disclosed?

Provided for if losing is more likely than not and the amount can be estimated; disclosed as a contingent liability if losing is possible but not probable.

Are contingent liabilities recognised in a business combination?

Yes, at fair value, if they are present obligations that can be measured reliably, even if an outflow is not probable.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 37IAS 37 provisions explainedIAS 37Restructuring provisionsIFRS 3Purchase price allocation

More in IAS 37

TopicAll 4 guides in IAS 37

This guide is general information. It is not tax or legal advice for your situation.