ACCA Strategic Business Reporting (SBR) Practice Exam

How are contingent assets recognized according to IAS 37?

1. Recognized when probable

2. Only recognized when realization of profit is virtually certain

3. Always recognized in the statement of financial position

4. Recorded as liabilities until confirmed

The correct answer is: Only recognized when realization of profit is virtually certain

Contingent assets are governed by IAS 37, which focuses on provisions, contingent liabilities, and contingent assets. According to IAS 37, contingent assets are not recognized in the statement of financial position as they do not meet the criteria for recognition as assets. Instead, they are disclosed when the inflow of economic benefits is probable. The selected answer is correct as it emphasizes that contingent assets can only be recognized when the realization of profit is virtually certain. This reflects a cautious approach, ensuring that an entity does not overstate its assets based on uncertain future benefits. Prioritizing only those contingent assets which have a high degree of certainty aligns with the financial reporting objective of reliability and prudence. Thus, while recognizing a contingent asset when it is probable might suggest some level of acknowledgment, the precise standard dictates that only when the realization of the asset is virtually certain should it be included in financial statements. This approach helps prevent the potential for significant misrepresentation and maintains the integrity of financial reporting.