UNCTAD Virtual Institute for Trade and Development
GDS logo
Sovereign Asset and Liability Management: An E-Learning Training Course
I. The Accounting/Financial Balance Sheet
II. Sovereign Asset and Liability Management Framework: Approach I
III. Sovereign Asset and Liability Management Framework: Approach II
IV. Sovereign Asset and Liability Management Framework: Approach III
V. Contingent Liabilities
i. Explicit Liabilities: Guarantees
ii. Implicit Liabilities: Financial Sector Bailouts and Natural Disasters
iii. Managing and Mitigating Contingent Liabilities



Contingent Liabilities

As discussed in Module I, Contingent Liabilities (CL) pose some of the greatest fiscal risks to sovereigns. CL may be explicit or implicit.  Explicit CL contractually or legally require the sovereign to assume responsibility should the event occur.  Implicit CL do not contractually or legally require anything of the sovereign but may require the government to intervene because of a “moral” or expected obligation. (see table of Explicit and Implicit CL in Module I)

The increase in CL is the result of 1) political preferences to use guarantees and other financing mechanisms that shield their true costs and do not require their inclusion in the general budget process and 2) passive risk management strategies that have simply not accounted for CL.  These two factors have led to the accumulation of CL by many governments and pose a great risk to them.  Lack of a clear definition of what "CL" actually are has contributed to their exclusion from the budgetary process, the definition of debt, and the risk management framework. 

While CL may pose risks to sovereigns, they also can be a useful and necessary tool in attaining policy objectives and correcting market failure.  For example, alternative methods of financing and insurance in the form of deposit insurance, public-private partnerships, and loan guarantees might be useful for the government to pursue particular policy objectives at the lowest possible cost.  From this perspective, CLs might be a useful tool for the sovereign.  However, the use of CLs becomes problematic when the sovereign fails to properly account for exposure to CLs or prefers the use of CLs because their costs can be hidden. For this reason, explicit contingent liabilities have been devised so the government can receive the benefits of utilizing CL while also attempting to quantify and properly account for the value of the CLs.

“Many alternative definitions of CL exist, but are not relevant to an economic analysis of fiscal risks.  For instance, in the accounting domain CL are only those obligations that remain off-balance sheet; contingencies that are recognized as on balance sheet as ‘provisions’ are not CL under the accounting definition…there are also different views on whether CL are actual liabilities when they are entered into or only when the contingent event occurs.  For example, current accounting standards (accrual) recognize CL 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 an expense on the income statement.  Under cash accounting , the expense is only recorded when the contingent event occurs and payment is made.  Current statistical standards, on the other hand recognize CL only if and when the contingency actually materializes and the payment has to be made” (Cebotari, 2008).

A summary of the recognition and disclosure of CL is provided below.  For more information regarding disclosure and transparency of CL, please see IFAC report on "2010 Handbook of International Public Sector Accounting Pronouncements".





Cash Accounting(1)

Only when the contingency is called and cash payment is made


Accrual Accounting(1)

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 payment is remote.

Statistical Reporting(2)




(1) International Public Sector Accounting Standards Board 19

(2) Government Finance Statistics Manual, 2001

Source: Cebotari, 2008

Only when the contingency is called and cash payment needs to be made.

Required as a memorandum to the balance sheet.




For more information on accrual vs. cash based budgeting, please see “Accrual Budgeting Useful in Certain Areas but Does Not Provide Sufficient Information for Reporting Our Long Term Challenges” by the GAO.

For the purposes of the Module, the term “contingent liability” will refer in the general sense to obligations that may become due if certain event(s) are triggered and not the definition of “contingent liability” within the accounting or statistical domain.













Next/Explicit Liabilities: Guarantees.>>