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

Countries that prepare their budgets on an accrual basis by definition appropriate the 
expected cost of those contingent obligations that meet the recognition criteria of a 
liability (Australia, Denmark, New Zealand, U.K.). In the U.K., for example, while the 
parliament approves an annual cash-based budget, it also scrutinizes the 3-year forward 
budgets presented by the government, which include both cash and non-cash expenditures. 
Under the latter, the government provisions for the expected cost of the guarantees it plans to 
issue during the coming three years as long these meet the recognition criteria under the 
accounting standards (see Annex II). The forward expenditure ceilings are binding, and 
departments that want to issue additional contingent liabilities would be expected to forego 
other expenditures to accommodate the cost of these liabilities. A few OECD countries have 
adopted accruals for specific transactions in the budget—most frequently the recording of 
interest on the public debt and employee pension costs, although as mentioned above, the 
U.S. has introduced also accrual budgeting for loan guarantees.
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Budgeting for the subsidy cost of the guarantee is not easy in practice, even though it is 
recognized as an appropriate treatment of guarantees (Kraan, 2004; OECD, 2005a). The 
difficulties generally lie in the estimation of the expected costs (costly models, difficulties in 
choosing appropriate discount rates) and the need to periodically reestimate these costs and 
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The fees are set for each type of risk under each project, and are tracked separately in the contingency fund. 
The fees are budgeted by public enterprises as debt payments, which are protected from expenditure cuts. 
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This appropriation requirement does not apply, however, to PPPs and to exceptional cases of public works in 
infrastructure, energy, communication, aeronautics, defense, and security. As a safeguard, the Superior Council 
for Fiscal Policy (Confis), which authorizes the issuance of these liabilities, needs to report quarterly to 
parliamentary commissions on the authorized liabilities issued under these exceptions. 
37
See Blöndal, 2004, for a discussion of the use of accrual budgeting in OECD member countries. 

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secure additional appropriations.
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There is also some resistance to budgeting only for 
selected items on an accrual basis.