Question

We are the plaintiff in a large lawsuit and believe that it is extremely likely that we will win. We that that this will have a large positive effect on our stock price. Can we book it? Why or why not? Support your answer

Answer 1

This falls under the definition of Contingent Asset, and should only be disclosed in the notes to Financial Statements.

A contingent asset is a potential economic benefit that is dependent on future events out of a company’s control.

Because of the concept of conservatism, a contingent asset and gain will not be recorded in a general ledger account or reported on the financial statements until they are certain (in this case, untill the lawsuit is settled).

IAS 37 states the following: “Contingent assets are not recognized, but they are disclosed when it is more likely than not that an inflow of benefits will occur. However, when the inflow of benefits is virtually certain an asset is recognized in the statement of financial position because that asset is no longer considered to be contingent.”