Contingent Liabilities: Issues and Practice; Aliona Cebotari; imf working Paper 08/245; October 1, 2008

 
None of these standards requires disclosure of risks that are not based on clear 
contractual obligations or disclosures in the context of budget documents. This vacuum 
has been filled by various fiscal transparency initiatives, including the IMF Code of Good 
Practices on Fiscal Transparency (2001, 2007) and the OECD Best Practices for Budget 
Transparency (2001), that require the disclosure of contingent liabilities and other major 
fiscal risks in budget documents, mid-year reports and annual financial statements (Table 3).
In summary, the requirements in the accounting standards and transparency initiatives 
suggest that the disclosure of contingent liabilities should include the following 
elements: 
• A classification of the outstanding contingent liabilities by major category.
• For each category, an explanation of the rationale for taking on contingent liabilities, in 
cases where this is a deliberate decision (guarantees, insurance). 
• For each category, the fiscal significance of the contingent liabilities. This should 
include, where feasible: (a) the total exposure under the liability (face value of the 
guarantee); (b) the expected fiscal cost (the net present value of expected payments 
and/or the annual cash flows); and (c) an indication of the risk associated with the 
guarantee, such as the unexpected loss at a given probability. In cases where 
quantification is difficult or may be undesirable on public policy grounds, the statement 
should provide a narrative description of the nature and scope of the liabilities. 

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Table 3. Accounting/Statistical Standards and Transparency Initiatives: 
What to Disclose
1/
Accounting 
standards
IPSAS 19 “Provisions, contingent liabilities and contingent assets” requires disclosure of the 
following information for each class of contingent obligations recognized as on-balance sheet 
liability at fair value:
• a brief description of the nature of the contingent liability and the expected timing of 
payments;
• an indication of the uncertainties about the amount or timing of these payments, 
including the major assumptions made concerning future events;
• the possibility of any reimbursement; and
• amounts at the beginning and end of the period, and the breakdown of the changes 
during the period, by cause. 
For contingent obligations not recognized on balance sheet—either because the contingency is 
not likely to materialize or because the payments cannot be estimated reasonably well—the 
same information should be disclosed, unless the probability of payments is remote. In addition, 
the government should present, where practicable, an estimate of the financial effect of each 
class of contingent liabilities (present value of expected payments). If it is not practicable, the 
fact needs to be stated.