The Korean government has developed a guidance on accounting treatment for contingency assets and liabilities to better respond to contingencies in the future, as the country adopted accrual accounting and double-entry bookkeeping into the national accounting system in 2009 fiscal year.
The Ministry of Strategy and Finance released two accounting rules by item and twelve accounting treatment guidelines on financial statements and major issues considered and adopted at the 9th national accounting system review committee meeting.
Contingency assets and liabilities are assets and liabilities for which the inflow or outflow of economic resources can take place depending on legal procedures that are underway.
Contingency assets refer to government’s assets for which the government has brought a lawsuit to claim its ownership and contingency liabilities refer to potential liabilities in the form of penalties or taxes that can be reimbursed depending on the outcome of the legal procedures.
The guidance on accounting treatment for contingency assets and liabilities has been developed as a standard for specific accounting treatments to complement the national accounting standard provision 50 "accounting treatment for contingency." This new guidance is expected to allow for a more reasonable bookkeeping of the inflow and outflow of resources.
According to the government’s plan, contingency assets will not be recorded as assets in financial statements when there is certainty about the inflow of economic resources and the amount can be estimated reasonably. Detailed information and their impact on financial status will be disclosed in footnotes. They will be recognized as assets when the inflow of economic resources actually happen.
In addition, different accounting treatment methods will be put in place depending on the probability of loss and the ability to estimate the amount of loss in case of contingency liabilities.
When there is certainty in estimating the probability of loss and the amount, the estimated amount will be reflected in the statement of financial operation and the amount will be accounted for as loss in the statement of financial position. When there is uncertainty regarding the probability of loss and estimation of amount, this information will be disclosed in footnote.
"The accounting treatment for contingency assets and liabilities will allow us to reflect financial impact of contingencies in a proper way. By identifying the outflow and inflow of financial resources that can happen in the future, we expect the management of government assets and liabilities to be enhanced,” states the ministry.