210 Government Finance Statistics Manual 2014
a contingent liability is recognized as a liability. With
contingent liabilities, there is typically uncertainty over
whether a payment will be required, and its potential
size.^71
7.252 A distinction is made between explicit and
implicit contingent liabilities. Explicit contingent li-
abilities are defi ned as legal or contractual fi nancial
arrangements that give rise to conditional require-
ments to make payments of economic value. Th e re-
quirements become eff ective if one or more stipulated
conditions arise. By contrast, implicit contingent
liabilities do not arise from a legal or contractual
source but are recognized aft er a condition or event
is realized. While the focus of GFS (and other mac-
roeconomic statistical systems) is largely on explicit
contingent liabilities, implicit contingent liabilities,
such as the net implicit obligations for future social
security benefi ts (see paragraph 7.261), are impor-
tant factors in fi scal risk and vulnerability analyses.
Other examples of implicit contingent liabilities in-
clude ensuring the solvency of the banking sector,
covering the obligations of subnational governments
(state and local governments) or the central bank in
the event of a default, assuming unguaranteed debt of
public sector units, and potential spending for natu-
ral disaster relief.^72
7.253 Figure 7.2 provides an overview of liabilities
and contingent liabilities in macroeconomic statis-
tics. Explicit contingent liabilities can take a variety
of forms, although guarantees are the most common.
However, not all guarantees are contingent liabilities;
as discussed earlier in this chapter, guarantees in the
form of fi nancial derivatives and provisions for calls
under standardized guarantee schemes are liabilities
on the balance sheet. On the other hand, one-off guar-
antees are contingent liabilities.
7.254 Explicit contingent liabilities comprise:- Publicly guaranteed debt (6M61), which is one-
off guarantees in the form of loan and other
debt instrument guarantees (see paragraphs
7.259–7.260)
(^71) Uncertainty about the potential size of liabilities does not make
them contingent liabilities.
(^72) It is recommended in this Manual (and the PSDS Guide) to
include as a separate memorandum item in the balance sheet the
net obligations for future social security benefi ts—oft en the larg-
est implicit contingency of government.
- Other one-off guarantees (6M62) for other
than publicly guaranteed debt (see paragraphs
7.259–7.260) - Explicit contingent liabilities not elsewhere classifi ed
(6M63), which are explicit contingent liabilities that
are not in the form of guarantees—for example:
Potential legal claims, which are claims stem-
ming from pending court cases^73
Indemnities, which are commitments to ac-
cept the risk of loss or damage another party
might suff er (e.g., indemnities against unfore-
seen tax liabilities arising in government con-
tracts with other units)
Uncalled capital, which is an obligation to
provide additional capital, on demand, to an
entity of which it is a shareholder (e.g., an in-
ternational fi nancial institution)
Potential payments resulting from PPP
arrangements.
7.255 Information on the stock positions of one-off
guarantees is relevant for public fi nancial policy and
analysis—particularly the stock position of publicly
guaranteed debt. It is recommended that publicly guar-
anteed debt (6M61) should be shown, at nominal value,
as a memorandum item to the balance sheet. If signifi -
cant, information on other one-off guarantees (6M62)
and explicit contingent liabilities not elsewhere classifi ed
(6M63) should also be included as a memorandum
item to the balance sheet, at nominal value.^74 One-off
guarantees are discussed in paragraphs 7.256–7.260.
One-off guarantees
7.256 One-off guarantees comprise those types of
guarantees where the debt instrument is so particular
that it is not possible to calculate the degree of risk(^73) A pending legal case may also be a contingent asset—for
example, a case in which the government has claimed damages
against another party.
(^74) Limitations of this approach are that it off ers no information on
the likelihood of the contingency occurring and it may overstate
the possible risk. For loan and other debt instrument guarantees,
the maximum potential loss is likely to be less than their nominal
value, because not all debts will default. Th ere are several other
approaches that address limitations to valuing explicit contingent
liabilities; they are discussed in detail in Chapter 4 of the PSDS
Guide and in Chapter 9 of the EDS Guide. Th e actual approach ad-
opted will depend on the availability of information on the type of
contingency. For this reason, it is particularly important to provide
metadata on the method(s) used to value contingent liabilities.