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

II. B
ACKGROUND
 
In this paper, the term contingent liability will be used in a general sense to refer to 
obligations whose timing and magnitude depend on the occurrence of some uncertain 
future event outside the control of the government. This definition highlights uncertainty 
with regard to timing and magnitude of the payment, and includes the possibility of the 
payment not coming due at all. Many alternative definitions of contingent liabilities exist, but 
are not germane to an economic analysis of fiscal risks. For instance, in the accounting 
domain, contingent liabilities are only those obligations that remain off-balance sheet; 
contingencies that are recognized on-balance sheet as “provisions” are not contingent 
liabilities under the accounting definition. In the field of statistics, the IMF’s 2001 
Government Finance Statistics Manual (GFSM) defines contingent liabilities as including, in 
addition to guarantees, the net present value of the accrued obligations of social security 
schemes. In this paper, social security benefits—such as those provided to government 
employees or old age pension benefits provided by the government to all citizens—are not 
treated as contingent liabilities, as they are not contingent on future events outside 
government control and as a group they are certain to occur. The paper thus treats future 
social benefits as implicit, but not contingent, government liabilities. 
There are also different views on whether contingent liabilities are actually liabilities 
when they are entered into or become so only when the contingent event occurs. For 
example, current accounting standards (accrual) recognize contingent liabilities at the 
moment they are incurred only if the contingency is deemed more likely than not to occur 
and if the payments that would need to be made can be reasonably measured, in which case 
the expected value of the payments is recognized as a liability on the balance sheet and 
expense in the income statement.
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Current statistical standards, on the other hand, recognize 
contingent liabilities only if and when the contingency actually materializes and the payment 
has to be made; this is largely prompted by the need to ensure a consistent set of national 
accounts, with no overlap between liabilities recorded in the public and private sector balance 
sheets.
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Most insight, however, can probably be gained from the proposals to reform these 
standards, which lean towards their immediate recognition as liabilities. The standard-setters 
came to the conclusion that the contractual obligation to enter into contingent liabilities is in 
itself not conditional and therefore is a liability in full right. What they found conditional is 
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International Financial Reporting Standards (IFRS) for private sector companies and International Public 
Sector Accounting Standards (IPSAS) for the public sector, developed on the basis of IFRS (see Annex I). 
7
The Government Finance Statistics Manual, GFSM 2001. The cash accounting standards treat contingent 
liabilities similarly to the statistical standards: the expense associated with contingent liabilities is only 
recognize when the contingent event occurs and a payment is made (assets and liabilities are not recognized).

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the amount that is required to settle the obligation, because it depends on the occurrence or 
nonoccurrence of uncertain future events; this uncertainty about future events can therefore 
be reflected in the measurement of the liability recognized, rather than in the fact of whether 
it is recognized or not. Under these proposals, in fact, the accounting term of “contingent 
liability” would disappear altogether (see Annex I for a detailed discussion of the accounting 
and statistical treatment of contingent liabilities).