Allocations , liabilities and potential assets

This is the uncovered part of the guarantee letter , that is as a company you presented a letter of guarantee from another company and you have facilities of a bank guarantee letter for example with the value of one million pounds . The company will afford 10% of the amount of guarantee letter ( about 100 thousands ) which is deducted from the company account temporarily  until the guarantee letter is made . The remaining amount ( 900 thousands ) is covered by the bank because the company has a facility guarantee letter . Now you have to include the 900000 in the financial statement and list them as a fixed liability. In general we can consider allocations as potential  liabilities  with no certain time or fixed value .

Allocations in the balance sheet :

Considering the difference , potential  liabilities aren’t the same as allocations , they are explained in the financial statements but aren’t listed in the balance sheet with any value as allocations .

No doubt estimations are an essential part of financial statements and allocations are an ideal example . They are one of the major items in the financial position that depend  mainly on estimations . So the estimation must be reliable in order to approve allocations . 

When it is not possible to estimate the liability accurately , then it is presented as a potential liability in the notes only and not as an allocation .

This is the difference between allocations and potential liabilities .

What are potential assets ? 

They are the result of unplanned or unexpected transactions which might  lead to cash inflow without being sure of  obtaining revenues . For example if the company filed a lawsuit against a person or a company following legal procedures and the result is not certain . In this case the company doesn’t admit the potential asset because the revenue hasn’t been obtained  yet . 

Another example on potential assets 

If there is a warehouse and it has been burned while the company has insured it . The insurance company then will have to pay the compensation value  but there must be investigations to make sure that the fire was not on purpose or caused by negligence .Therefore the company can’t list the compensation value  as an asset in the financial position until the insurance company approves it . So the company lists the compensation value as a potential asset in the concluding notes of the financial statements . The company discloses this value in the financial statements only shortly unlike the potential assets in the  balance sheet in order not to get false indicators of potential income from the potential assets at the present period . 

Another example on allocations , liabilities and potential assets :

If the company files a lawsuit on another company because the latter used or stole its trademark, it can’t disclose the compensation value until the legal procedures end and it receives the money . Then it lists the amount as a potential asset in the concluding notes of financial statements .

 In the next article we will discuss the disclosure of  allocations ,potential  liabilities and potential assets in the financial position .

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