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HMRC internal manual

Business Income Manual

Specific deductions: provisions: accounting standards and GAAP: contingencies

Section 21 of FRS102 distinguishes between ‘provisions’ which are liabilities that must be recognised and ‘contingent liabilities’, which should not be recognised but must be disclosed in a note to the accounts (unless the possibility of an outflow of resources is remote). Broadly, contingent liabilities arise from possible (but not probable) obligations, from obligations where it is possible (but not probable) that there will be a transfer of economic benefits, and in instances where it is not possible to make a reliable estimate of the amount of the obligation.

Section 21 of FRS102 defines contingent assets as ‘possible assets that arise from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the business’. Contingent assets must not be recognised. However, when the flow of future economic benefits to the business is virtually certain, the related asset is not a contingent asset and its recognition is appropriate.