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Note 25: Contingent Liabilities and Contingent Assets

Contingent liabilities are:

  • costs that the Crown will have to face if a particular event occurs, or
  • present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements (unquantifiable liabilities).

Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims, and uncalled capital. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation.

In general, if a contingent liability was realised, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and increase net core Crown debt. However, in the case of some contingencies (eg, uncalled capital), the negative impact would be restricted to net core Crown debt.

Contingent assets are possible assets that have arisen from past events but the amount of the asset, or whether it will eventuate, will not be confirmed until a particular event occurs.

Contingent liabilities and contingent assets involving amounts of over $20 million are separately disclosed. Any quantifiable contingencies less than $20 million are included in the “other quantifiable” total. Some contingencies of the Crown are not able to be quantified; these unquantifiable contingent liabilities and contingent assets are disclosed as at 30 June 2017 where they are expected to be material but not remote. Where there is an obligation under New Zealand GAAP, amounts have been recognised in the financial statements.

Contingent Liabilities

  Note Actual
30 June
2017
$m
30 June
2016
$m

Quantifiable Contingent Liabilities

     
Uncalled capital a 7,638 7,910
Guarantees and indemnities b 690 288
Legal proceedings and disputes c 333 221
Other contingent liabilities d 327 314
Total quantifiable contingent liabilities 8,988 8,733

By source

     
Core Crown   8,769 8,593
Crown entities   16 40
State-owned Enterprises   203 100
Total quantifiable contingent liabilities 8,988 8,733

Contingent liabilities and contingent assets are reported at the point at which the contingency is evident or when a present liability is unable to be measured with sufficient reliability to be recorded in the financial statements (unquantifiable liability).  Contingent liabilities, including unquantifiable liabilities, are disclosed if the possibility that they will crystallise is more than remote.  Contingent assets are disclosed if it is probable that the benefits will be realised.

a) Uncalled Capital

As part of the Crown's commitment to a multilateral approach to ensure global financial and economic stability, New Zealand, as a member country of these organisations, contributes capital by subscribing to shares in certain institutions. The capital (when called) is typically used to raise additional funding for loans to member countries, or in the case of the quota contributions to directly finance lending to members. For New Zealand and other donor countries, capital contributions comprise both “paid-in” capital and “callable capital or promissory notes”.

  Note Actual
30 June
2017
$m
30 June
2016
$m
Asian Development Bank i 2,941 3,051
International Monetary Fund - promissory notes ii 2,123 2,205
International Bank for Reconstruction and Development iii 1,512 1,558
International Monetary Fund - arrangements to borrow iv 540 559
Asian Infrastructure Investment Bank v 504 519
Other uncalled capital   18 18
Total uncalled capital 7,638 7,910

i)  Asian Development Bank (ADB)

New Zealand was a founding-regional member of the ADB, their aim is to accelerate economic development in developing countries in Asia and the South Pacific. New Zealand is a regional member but as a donor is not entitled to borrow from the Bank. Accordingly, New Zealand is in a similar position to a non-regional member, and contributes to the ADB's resources only as required by ADB.

ii)  IMF Promissory Notes

New Zealand's subscription to the IMF is partly paid in cash and partly in promissory notes (being uncalled capital). The respective levels of called and uncalled capital change when calls are made by the IMF under the Financial Transactions plan to provide loan packages to borrowing countries. Even though promissory notes are technically “at call”, they are treated as contingent liabilities, as there are significant restrictions on the actual ability to call them, and there is no realistic estimate of either the amount or the timeframe of any call.

iii)  International Bank for Reconstruction and Development (IBRD)

The IBRD is the main lending organisation of the World Bank Group. New Zealand, along with 188 other countries, is a member country and shareholder in the World Bank Group. The percentage of ownership is determined by the size of the economy and the amount of capital contributed to support the Bank's borrowing activities among international capital markets.

iv)  IMF arrangements to borrow

The Crown has agreed to make funds available to the IMF to support international financial systems in the event of a significant crisis. This is a contingent liability as it will depend upon uncertain trigger events occurring and the IMF calling the funds.

v)  Asian Infrastructure Investment Bank (AIIB)

New Zealand was a founding-regional member of the AIIB. AIIB is a Chinese initiated multilateral investment bank aimed at addressing the significant gap in infrastructure investment across Asia. The Crown has agreed to make funds available to the AIIB, which will depend upon uncertain trigger events and AIIB calling the funds.

Southern Response Earthquake Services Ltd

In addition to the uncalled capital detailed above, the Crown has agreed to provide an uncalled capital facility of $230 million to Southern Response Earthquake Service Limited (SRES) to support the Christchurch earthquake recovery process.

The above capital support will increase core Crown net debt when called; however, as Southern Response is part of the Crown there would be no impact on the total Crown operating balance.

b) Guarantees and Indemnities

Guarantees are legally binding promises made by the Crown to assume responsibility for a debt, or performance of an obligation of another party, should that party default. Guarantees generally relate to the payment of money but may require the performance of services.

Indemnities are legally binding promises where the Crown undertakes to accept the risk of loss or damage that another party may suffer and to hold the other party harmless against loss caused by a specific stated event.

  Note Actual
30 June
2017
$m
30 June
2016
$m
The Body Laid Bare Exhibition indemnity i 459 -  
New Zealand Export Credit Office guarantees ii 136 211
Air New Zealand letters of credit and performance bonds iii 32 33
Other guarantees and indemnities   63 44
Total guarantees and indemnities 690 288

i)  The Body Laid Bare Exhibition indemnity

From March to July 2017, the Auckland Art Gallery Toi o Tāmaki is hosting the exhibition The Body Laid Bare: Masterpieces from the Tate Gallery. The exhibition is indemnified under the Government Indemnity of Touring Exhibition Scheme from 7 February 2017 to 28 July 2017 to cover the period of transit and display of these valuable works of art.

ii)  New Zealand Export Credit Office guarantees

The New Zealand Export Credit Office provides a range of guarantee products to assist New Zealand exporters manage risk and capitalise on trade opportunities around the globe. The obligations to third parties are guaranteed by the Crown and are intended to extend the capacity of facilities in the private sector.

iii)  Air New Zealand letters of credit and performance bonds 

The letters of credit are primarily given in relation to passenger charges and airport landing charges. Guarantees are also provided in respect of credit card obligations. The performance bonds are primarily given in respect of engineering contracts.

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