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Contingent Asset

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<p align="center"> <strong>Contingent Asset</strong></p>
 
 
<p>Government  Accounting Standards Advisory Board ([http://www.gasab.gov.in/ GASAB])  constituted by Comptroller and Auditor General of India ([http://cag.gov.in/ CAG])  has issued Indian Government Financial Reporting Standard (IGFRS) -5 on [http://www.gasab.gov.in/pdf/igfrs-5.pdf <em>Contingent Liabilities (other than  guarantees) and Contingent Assets</em>]<em>. </em>This Standardprovide for disclosure requirements of contingent  liabilities (other  than guarantees)  and contingent assets of Union and State Governments in their financial  statements. The standards also define a contingent liability and asset. <br />
 
<p>Government  Accounting Standards Advisory Board ([http://www.gasab.gov.in/ GASAB])  constituted by Comptroller and Auditor General of India ([http://cag.gov.in/ CAG])  has issued Indian Government Financial Reporting Standard (IGFRS) -5 on [http://www.gasab.gov.in/pdf/igfrs-5.pdf <em>Contingent Liabilities (other than  guarantees) and Contingent Assets</em>]<em>. </em>This Standardprovide for disclosure requirements of contingent  liabilities (other  than guarantees)  and contingent assets of Union and State Governments in their financial  statements. The standards also define a contingent liability and asset. <br />
 
As  per IGFRS 5, Contingent asset is &lsquo;a possible asset that arises from past events  and whose existence will be confirmed only by the occurrence of one or more  uncertain future events not wholly within the control of the entity&rsquo;. Thus it  is a potential future asset for the Government and not a present asset. It  arises from some past events and its existence will be confirmed only by the  occurrence of some future events. Its time of payment, or the quantum of  payment, or both, are uncertain.<br />
 
As  per IGFRS 5, Contingent asset is &lsquo;a possible asset that arises from past events  and whose existence will be confirmed only by the occurrence of one or more  uncertain future events not wholly within the control of the entity&rsquo;. Thus it  is a potential future asset for the Government and not a present asset. It  arises from some past events and its existence will be confirmed only by the  occurrence of some future events. Its time of payment, or the quantum of  payment, or both, are uncertain.<br />
 
eg.  tax arrears, which are under litigation, may or may not flow to government  depending upon the final verdict by Courts. Similarly, ownership of land  acquired, but under litigation, may or may not come to government.</p>
 
eg.  tax arrears, which are under litigation, may or may not flow to government  depending upon the final verdict by Courts. Similarly, ownership of land  acquired, but under litigation, may or may not come to government.</p>
<p><strong>Contributed by </strong><br />
 
Rosemary K Abraham (IES 2006)</p>
 
<p align="center"> <strong>Contingent Liabilities </strong></p>
 
<p>  Contingent  Liabilities of the Government are like insurance obligations, which are contingent  or conditional upon the occurrence of certain events, requiring payments by the  Government, who had promised or agreed in the past to make good such  liabilities, regardless of its financial health. It is a possible obligation  and not a present obligation. It arises from some past events and its existence  will be confirmed only by the occurrence of some future events. Its time of  payment or the quantum of payment or both are uncertain. </p>
 
<p>  Contingent  liabilities arise mainly because of sovereign guarantees.  However, it goes beyond that.</p>
 
<p><strong>Types of Contingent Liabilities</strong></p>
 
<p>  A  contingent liability may arise due to either explicit legal obligation or an  implicit constructive obligation.</p>
 
<p>  A <em>legal obligation</em> relates to specific  government obligation defined by law or contract, e.g., guarantees given  against third party, crop insurance, tax refunds under litigation, indemnities,  etc. </p>
 
<p> A  constructive or <em>implicit obligation</em> is an obligation that may arise when a government indicates to other parties  that it accepts certain responsibilities and has created certain valid  expectation on the part of those parties that it will discharge the  responsibilities. eg. Letter of comfort issued by governments (Union and  States), bailing out public sector insurance, banking and other entities, etc.  This also represents a moral obligation or expected burden for the government  not in the legal sense, but based on public expectations and political  pressures. These liabilities arise out of the fact that Government is always perceived  as the &quot;last resort&quot;. </p>
 
<p>  On  the basis of the provisions made for meeting such contingent liabilities, it  can be classified as either funded or unfunded liabilities. eg. the liability is  funded in case of sovereign guarantees (guarantee is given in return for a fee  and the collected fee is kept in a guarantee redemption fund). An unfunded  Contingent Liability can arise due to some natural / manmade calamity say  Bhopal Tragedy related payments, obligations on account of legislative changes  with retrospective effect etc.</p>
 
<p><strong>Need for Management of Contingent Liability </strong></p>
 
<p>[http://www.finmin.nic.in/reports/report_internal_working_group_on_debt_management.pdf Report of the Internal Working Group on Debt  Management] (October 2008),  chaired by Shri. Jahangir Aziz and the report of the [http://arthapedia.in/index.php?title=Financial_Sector_Legislative_Reforms_Commission_(FSLRC) Financial  Sector Legislative Reforms Commission (FSLRC)] (2013) which studied the issue of public debt management had highlighted the  importance of managing contingent liabilities in India. This is because, there  are close interconnections between contingent liabilities and debt issuance. For  instance, the invoking of guarantees can have a substantial impact on the risk  assessment of the public debt structure of the Central Government. </p>
 
<p>The Internal Working Group of Ministry of Finance for setting up an  independent debt management office, chaired by Shri. Jahangir Aziz, in its [http://www.finmin.nic.in/reports/report_internal_working_group_on_debt_management.pdf Report ] (October 2008) had highlighted the following  issues of contingent liabilities. </p>
 
<ul>
 
  <li>Explicit contingent  liabilities are a cost-effective manner for states to incentivise the private  provision of public goods. However, proper pricing and valuation of these  guarantees is very important for efficient risk management by the State. There  could be significant negative fiscal repercussions for the State if contingent  liabilities mature in large numbers at the same point in time.</li>
 
  <li>By their very nature,  contingent liabilities are most likely to be called in during an economic  downturn. These fiscal payments are counter-cyclical in nature. But, this is  also the time when the state is least able to afford to fulfil such obligations  due to reduced revenue collection. Hence, risk management of these liabilities  would allow states to lessen the risk of default on these liabilities. </li>
 
  <li>Making the nature and  volume of these liabilities public will increase both transparency and  accountability in budgetary transactions. </li>
 
  <li>Further, guarantee-risk  is conceptually the same as the risk taken in borrowing and on-lending funds,  which is a risk that a debt management office will have to deal with on a  day-to-day basis.</li>
 
</ul>
 
<p>Hence  the Aziz Committee had suggested the creation of a <em>&quot;National Treasury Management Agency&quot;</em> to deal with such  contingency liability management issues. <br />
 
  <br />
 
  Following  up on these recommendations, the [http://arthapedia.in/index.php?title=Financial_Sector_Legislative_Reforms_Commission_(FSLRC) Financial  Sector Legislative Reforms Commission (FSLRC)] which submitted its report in 2013 suggested creating a  Public Debt Management Agency (PDMA)  and was of the view that PDMA must manage and execute implicit and explicit  contingent liabilities of the Government. Further, PDMA must evaluate the  potential risk of these contingent liabilities and advise the Central  Government on charging appropriate fees. In addition, [http://arthapedia.in/index.php?title=Financial_Sector_Legislative_Reforms_Commission_(FSLRC) FSLRC] advised that the Government should be required to seek the public debt  management agency&rsquo;s advice before issuing any fresh guarantees since this has  implications for the overall stability of the public debt portfolio. Given  this, FSLRC felt that the PDMA should advise the Central Government on making  provisions for contingent credit lines with bilateral and multi-lateral  agreements and establish similar credit lines with international agencies. FSLRC  felt that the management of contingent liabilities is a specialised function  that involves undertaking the risk assessment of clients. Therefore, it felt  that the public debt management agency should be allowed to contract out in  part or in entirety the management of contingent liabilities to outside  agencies if it so chooses.</p>
 
<p>In  short, Contingent liabilities management include: </p>
 
<ul>
 
  <li>Assessing  and pricing credit risk. </li>
 
  <li>Implementing  policies and guidelines for the issue of Government guarantees and on-lending  of borrowed funds. </li>
 
  <li>Advise  on recapitalization of public sector enterprises given a risk management policy  framework. </li>
 
  <li>Record  and report government guarantees and other contingent liabilities.</li>
 
</ul>
 
<p>The [http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=307 RBI  Group to Assess Fiscal Risk of State Government Guarantees (2002)] had also analysed fiscal exposure of States to guarantees and made similar  recommendations regarding monitoring and pricing of guarantees.</p>
 
<p><strong>Operational management of Contingent Liabilities in  India</strong></p>
 
<p>  The [http://arthapedia.in/index.php?title=Fiscal_Responsibility_and_Budget_Management_(FRBM)_Act FRBM  Act 2003] mandates the Central Government to  specify the annual target for assuming contingent liabilities which are in the  form of guarantees. Accordingly, the FRBM Rules prescribe a cap of 0.5% of GDP  in any financial year on the quantum of guarantees that the Central Government  can assume in the particular financial year. In order to ensure greater  transparency in its fiscal operation in public interest, the FRBM rules require  the Central Government, at the time of presenting the annual financial  statement and demand for grants, to make certain disclosure statements of  receivables and payables as detailed below: </p>
 
<ul>
 
  <li>Tax Revenues raised but  not realised </li>
 
  <li>Arrears of Non Tax  Revenue </li>
 
  <li>Guarantees given by the  government</li>
 
</ul>
 
<p>Further,  Government Accounting Standards Advisory Board ([http://www.gasab.gov.in/ GASAB])  constituted by Comptroller and Auditor General of India ([http://cag.gov.in/ CAG])  has issued Indian Government Financial Reporting Standard (IGFRS) -5 on [http://www.gasab.gov.in/pdf/igfrs-5.pdf <em>Contingent Liabilities (other than  guarantees) and Contingent Assets</em>]<em>. </em>This Standardprovide for disclosure requirements of contingent  liabilities (other  than guarantees)  and contingent  assets of  Union and State Governments in their financial statements.</p>
 
<p>  Based  on the recommendations of FSLRC and Jahangir Aziz Committee, Union [http://indiabudget.nic.in/ Budget 2015-16] has announced the creation of a Public Debt Management Agency which  amongst other things would also manage Contingent liabilities of the Central  Government including developing ways for its measurement, reduction in quantum  and cost of such liabilities.  PDMA would  also be advising central Government on its contingent liabilities </p>
 
<p>&nbsp;</p>
 
<p><strong>Also See </strong></p>
 
<p>[http://arthapedia.in/index.php?title=Contingency_Fund_of_India Contingency Fund of India] <br />
 
  Contingent Asset   <br />
 
  Sovereign Guarantee <br />
 
[http://arthapedia.in/index.php?title=Guarantee_Redemption_Fund Guarantee Redemption Fund]</p>
 
<p><strong>References </strong></p>
 
<p>[http://finmin.nic.in/the_ministry/dept_eco_affairs/budget/govern_guarantee_policy.pdf Government  Guarantee Policy 2010] </p>
 
<p>[http://www.gasab.gov.in/pdf/igfrs-5.pdf Indian Government  Financial Reporting Standard (IGFRS) 5 on Contingent Liabilities (other than  guarantees) and Contingent Assets]</p>
 
  
  

Revision as of 13:54, 10 March 2015

Government Accounting Standards Advisory Board (GASAB) constituted by Comptroller and Auditor General of India (CAG) has issued Indian Government Financial Reporting Standard (IGFRS) -5 on Contingent Liabilities (other than guarantees) and Contingent Assets. This Standardprovide for disclosure requirements of contingent liabilities (other than guarantees) and contingent assets of Union and State Governments in their financial statements. The standards also define a contingent liability and asset.
As per IGFRS 5, Contingent asset is ‘a possible asset that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the control of the entity’. Thus it is a potential future asset for the Government and not a present asset. It arises from some past events and its existence will be confirmed only by the occurrence of some future events. Its time of payment, or the quantum of payment, or both, are uncertain.
eg. tax arrears, which are under litigation, may or may not flow to government depending upon the final verdict by Courts. Similarly, ownership of land acquired, but under litigation, may or may not come to government.


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