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

Recognition 
The question of whether contingent liabilities are true government liabilities when entered 
into (e.g., when a contract to provide guarantees is signed) is not an easy one, given the 
uncertainty about whether the contingency will materialize or not. The accounting and 
statistical standards provide different answers to this, the former relying on the probability of 
the contingency occurring and the latter on its occurrence or not. 
Accounting 
Treatment 

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Under the current accounting standards (IFRS for the private sector and IPSAS for the public 
sector):
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• For accrual accounting, contingent liabilities are recognized as liabilities at the moment 
of initiation if: (a) the probability that the contingency will occur and hence a payment 
would have to be made is more than 50 percent; and (b) these payments can be 
reasonably measured.
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If both of these criteria are met, governments that prepare their 
budgets and financial statements on an accrual basis recognize the net present value of 
the amount expected to be called as a liability on the balance sheet and expense in the 
income statement at the time the contingent liability instrument is issued (this is recorded 
as a “provision,” or a liability/expense of uncertain amount and timing). Most of the 
guarantees would probably have a less then 50 percent chance of being called given that 
most one-off guarantees are given under the assumption that they will not be called. 
Because many individual guarantees are unlikely to be called, accounting standards allow 
the probability of payment to be determined by considering a number of similar 
guarantees as a class.
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• For cash accounting, assets and liabilities are not recognized, and the expense associated 
with contingent liabilities is only recognized if and when the contingent event actually 
occurs and a payment is made.
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The thinking in the accounting community about contingent liabilities has been changing, 
however. The International Accounting Standard Board (IASB) has issued an Exposure Draft 
in 2005 proposing to amend the IFRS so as to require contingent liabilities to be recognized 
immediately at fair value.
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The draft comes to the conclusion that the contractual obligation 
itself is not conditional and therefore is a liability in full right, in fact proposing to do away 
with the term “contingent liability” altogether. What is conditional in these obligations is 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 would 
therefore be reflected in the measurement of the liability recognized, rather than in the fact of 
whether it is recognized or not. This approach is consistent with the methods already used in 
Sweden and the U.S., where an estimate of the expected payment is made for all guarantees. 
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This section focuses largely on the recognition and disclosure of contingent liabilities under IPSAS 19 
(Provisions, Contingent Liabilities and Contingent Assets), but there are classes of contingent liabilities that 
could be treated under different standards depending on the type of contingency concerned. For example:
(i) IPSAS 15 deals with financial instruments carried at fair value (financial guarantee contracts, letters of 
credit, credit default contracts, and possibly exchange rate and interest rate guarantees); and (ii) IFRS 4 deals 
with insurance contracts.
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In IPSAS, contingent liabilities that meet these criteria and are recognized in financial statements are called 
“provisions” (defined as liabilities of uncertain timing and amount), with the remaining liabilities—under which 
the probability of an outflow is smaller than 50 percent and that cannot be reasonably estimated—defined as 
“contingent liabilities.” In this section, however, we continue referring to contingent liabilities in the more 
general sense noted earlier, rather than in the accounting sense. 
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See also Hemming et al., 2006, including for a description of the accounting and statistical treatment of 
contingent liabilities under PPPs. 
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IPSASB, “Financial Reporting Under the Cash Basis of Accounting” (Unnumbered, January 2003). 
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Exposure Draft of Proposed Amendments to IAS37 and IAS19. 

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Under current statistical reporting standards (the IMF’s GFSM 2001 or the European Union’s 
ESA-95) contingent liabilities are not considered liabilities until the contingency 
materializes, and therefore they need not be recorded in financial statements as a 
liability/expense until then. The reason for this approach rests largely on the need to ensure a 
consistent set of national accounts, in which an obligation that is recorded on the balance 
sheet of the private sector (e.g., the full amount of the loan) should not be also recorded on 
the balance sheet of the public sector (e.g., the expected cost of the loan’s guarantee).
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Statistical 
Treatment 
Work is currently underway to harmonize the statistical and accounting standards, including 
their treatment of contingent liabilities. An International Task Force on the Harmonization of 
Public Accounts has been set up under the aegis of the OECD to study the feasibility of 
harmonization between the different international government accounting and statistical 
standards, including the 1993 System of National Accounts (SNA), ESA-95, GFSM 2001, 
and IFRS/IPSAS.