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

Measurement of Risks under the Standards
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The public sector accounting standards suggest that the best estimate of the amount required 
to settle contingent obligations is the “expected value”, which weighs all possible outcomes 
by their associated probabilities, measured before tax or tax equivalents.
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Where the time value of money would have a material impact on the estimate, the estimate 
should be the present value of the expenditures expected to be needed to settle the obligation. 
When a contingent obligation is discounted over a number of years, its present value will 
increase each year as the provision comes closer to the expected time of settlement. The 
standards require (paragraph 97(e)) that this increase in the recorded liability that is due to 
the passage of time be disclosed. 
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It suggests that in determining which provisions or contingent liabilities may be aggregated to form a class, it 
is necessary to consider whether their nature is sufficiently similar for a single statement about them to fulfill 
the requirements of the first and second bullets in this paragraph. Thus, it may be appropriate to treat as a single 
class of provision amounts relating to one type of obligation, but it would not be appropriate to treat as a single 
class amounts relating to environmental restoration costs and amounts that are subject to legal proceedings 
(IPSAS 19). 
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Based on IPSAS 19, paragraphs 44–57. 
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Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, 
the mid-point of the range is used. 

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Table A1. Summary of the Main Requirements for Recognition and Disclosures of 
Contingent Liabilities
 
Recognition 
Disclosure 
Ca
sh
A
cc
ounti
ng
Only when the contingency is called and 
cash payments need to be made. 
Encouraged.
Accrual 
A
ccount
ing 
IPSAS 1
9 
The expected cost of a contingent 
obligation should be recognized if: (i) it is 
more likely than not (50 percent) that the 
event will occur; and (ii) the amount of the 
obligation can be measured with sufficient 
reliability. Liabilities that do not satisfy 
these criteria should not be recognized. 
Required for the remaining contingent 
liabilities, unless the likelihood of the 
payment is remote. 
Sta
tistic
al 
R
epor
tin
g 
GF
S
20
01
Only when the contingency is called and 
cash payments need to be made. 
Required as a memorandum item to the 
balance sheet. 
The discount rate used to discount expected future cash payments should be a pre-tax rate 
that reflects current market assessments of the time value of money and the risks specific to 
the liability. If the expected future cash flow has already been adjusted for risks (variability 
of outcomes) under a specific contingent liability, then this risk adjustment should not be 
reflected again in the discount rate. Disclosure of the uncertainties surrounding the amount of 
the expenditure is made under paragraph 98(b). 
More generally, the standards put forward a number of general qualitative characteristics that 
the information presented in financial statements should meet, among them are those of 
neutrality (free from bias) and materiality (with information considered material if its 
omission or misstatement could influence the decisions of users or assessments made on the 
basis of the financial statements) (IPSAS 1, Presentation of Financial Statements). 

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