6.8 Contingent liabilities
6.8.1 Introduction
When determining the accounting disclosures for contingent liabilities, the NZ IAS 37 definition is the relevant definition.
6.8.2 Types of contingent liabilities
The major types of contingent liabilities that may arise in respect of non-departmental activities include guarantees, indemnities and warranties, performance bonds, legal disputes, uncalled capital on shares and other securities.
Departments should be aware that guarantees, indemnities and warranties might be couched in language that hides their nature. This would particularly apply where formal contracts do not exist. A guarantee may be given without the term "guarantee" ever being used. Similarly, the use of the term "guarantee" may not necessarily mean that a contingent liability arises (i.e. Guaranteed Retirement Income).
6.8.3 Register of contingent assets and liabilities
Each Government Department must maintain a Register of Contingent Assets and Contingent Liabilities in which all contingent liabilities given on behalf of the Crown by, or in respect of, the department are to be recorded. The register must disclose the nature of the contingent liability and provide such details as the date that it was incurred, the authority under which it was given, its term, and the amount if it is able to be quantified. As good practice, the registers should also detail how the amount was quantified and justify the amount, and if unquantified, explain why that is. Registers should also detail how the department is managing the risk of the contingent liability and assess the probability of any outflows occurring.
The Chief Executive must determine the responsibility for the management of the Register of Contingent Assets and Contingent Liabilities. It is recommended that the Register be operated or monitored by the Chief Legal Adviser or where this does not exist, by the senior Corporate Services Manager. These personnel have the greatest knowledge of the contracts entered into by the Department and of any instances where the Department has bound the Crown to future possible expenditure.
6.8.4 Certification by Minister
At 31 December and 30 June, the details of current guarantees from each departmental register must be provided to the Responsible Minister of the Department for certification that they are unaware of any additional contingent liabilities that have been omitted. For Offices of Parliament the certification will be provided by the Chief Executive.
6.8.5 Power to give guarantees and indemnities
Subject to delegations or regulations, all guarantees and indemnities are required to be given or approved by the Minister of Finance. Under section 65ZD of the Act, the power to give guarantees and indemnities has been conferred upon the Minister of Finance. Under section 65ZE a department may give a guarantee or indemnity that is of a type specified in regulations, if it appears to the department to be necessary or expedient in the public interest to do so. The Public Finance (Departmental Guarantees and Indemnities) Regulations 2007 specify the types of guarantees or indemnities that a department may give under s65ZE.
Costs incurred under guarantees or indemnities that are authorised by regulations or given under delegated authority are to be met out of departments' baselines and are to be advised to the Secretary to the Treasury.
Where a contingent liability exceeding $10,000,000 is incurred under section 65ZD or 65ZE, a statement that the contingent liability has been incurred, containing such details relating to that guarantee or indemnity as the Minister considers appropriate, must be tabled in Parliament as soon as practicable.
Further guidance on guarantees and indemnities can be found in the document “Guidance for issuing and Managing Crown and Departmental Indemnities and Guarantees” issued by Treasury in February 2011. This guidance document is not for general public release and can be accessed by departments via CFISnet.
