1. This version replaces Treasury Board Accounting Standard (TBAS) 3.6 issued in 2001 and is effective for the financial statements of the 2005-06 fiscal year and subsequent.

2. This section should be read in conjunction with the Public Sector Accounting Handbook sections 3300 Contingent Liabilities and 3310 Loan Guarantees.

3. A contingency is an existing condition or situation involving uncertainty as to possible gain or loss to an organization that will ultimately be resolved when one or more future events occur or fail to occur. That uncertainty will ultimately be resolved when one or more future events not wholly within the department's/agency's control occurs or fails to occur. Resolution of the uncertainty may confirm the acquisition of an asset or the reduction of a liability or the loss or impairment of an asset or the incurrence of a liability.

4. Departments and agencies may have contingent liabilities as a result of activities, such as: guarantees of the indebtedness of others; claims and pending or threatened litigation; environmental contamination; arrangements with international organizations; and insurance programs.

5. Normal uncertainties connected with ongoing and recurring accounting estimates do not fall within the scope of contingencies. For example, amounts owed for goods and services received but not billed are not contingencies, even though the amounts may be estimated. There is nothing uncertain about the fact that these obligations have been incurred; any uncertainty is related solely to the amount thereof.

6. The uncertainty relating to occurrence or non-occurrence of the future event, which determines the outcome of a contingency, can be expressed by a range of probabilities. The range of probabilities can be broadly defined as:

1. Likely - the chance of occurrence (or non-occurrence) of the future event(s) is high (a greater than 70% probability);
2. Unlikely - the chance of the occurrence (or non-occurrence) of the future event(s) is slight (a less than 30% probability); and
3. Not determinable - the chance of occurrence (or non-occurrence) of the future event(s) cannot be determined (a probability between 30% and 70%).

7. Prediction of the outcome of contingencies, including estimation of the financial effects, is a matter of judgment by those responsible for preparing financial statements, taking into account the particular circumstances. In identifying contingencies and determining their amount, consideration would be given to all information available prior to completion of the financial statements, supplemented by experience in similar transactions. An updated legal opinion should be solicited for litigation items for each year-end at a minimum; more frequent updates should be obtained for significant items. Departments and agencies that have a material amount of homogeneous contingencies, such as contingencies related to loan guarantee programs, should develop a methodology to assess the likelihood and amount of possible losses.

8. Departments are to record an estimated liability for a contingency once it is assessed as likely to result in a liability and it can be reasonably estimated. However, the following two exceptions apply:

• Where the magnitude of the estimated liability is so significant that its inclusion in expense/liabilities risks revealing the estimate of potential liability; and
• Where the contingency relates to decisions of TBS as the Public Service employer and the potential impact of the claim extends across many departments.

In these situations, the accounting treatment in the departmental financial statements should be limited to note disclosure. The liability and related expense stemming from these contingencies should be communicated to TBS so that they may be recorded in the consolidated financial statements. A department will record the expense and liability in their accounts once the uncertainty surrounding the liability is removed (for example, a court decision is rendered or a settlement agreement is reached).

9. The existence of a contingent liability should be disclosed in the notes to the financial statements when:

• The occurrence of the confirming future event is likely but the amount of the liability cannot be reasonably estimated;
• The occurrence of the confirming future event is likely and an accrual has been made, but there exists an exposure to liability in excess of the amount accrued;
• The occurrence of the confirming future event is not determinable;
• The occurrence of the confirming future event is likely, the amount of the liability can be reasonably estimated, but one of the two exceptions listed in paragraph 8 applies.

10. To illustrate the application of the accounting treatment related to contingent liabilities in specific situations please refer to the table below:

11. The liability recorded for a likely contingency continues to be recognized until it is settled or otherwise extinguished, or until the probability of the occurrence of the future confirming event is considered unlikely.

12. Contingent recoveries (gains) are not to be accrued in the financial statements as this could result in the recognition of revenue that might never be realized. Disclosure of a contingent recovery which is considered likely to be realized and is material should be included in a note to the financial statements. Particular care should be exercised in the disclosure of contingent recoveries to avoid a misleading implication as to the likelihood of realization.

13. Departments and agencies will disclose information in their financial statements to describe their contingent liabilities at the end of the accounting period. The following information should be disclosed in the notes:

• The nature of the contingent liability;
• The best estimate of the contingent liability or a range of possible amounts, except where the amount cannot be reasonably estimated or where this disclosure would have an adverse effect on the outcome;
• The reasons for any non-disclosure of the estimate of contingent liability of range of possible amounts
• When an estimate of the amount has been made, the basis for that estimate.

The level of detail disclosed in the financial statements will depend on the usefulness of the information to the reader to assessing the nature and extent of a department's contingent liabilities. The level of disclosure should also consider the sensitivity of the information.

14. An example of note disclosure for contingent liabilities stemming from claims and litigation, where the exclusions in paragraph 8 do not apply, is as follows:

"In the normal course of its operations, the department becomes involved in various legal actions. Some of these potential liabilities may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability has been accrued and an expense recorded on the department's financial statements. As at March 31, 2005, the department has 75 claims outstanding and a contingent liability of $3 million based on the department's legal assessment of potential liability. The existence and amount of liability depend upon the future outcome of these claims, which are not currently determinable."

15. Where one of the exclusions in paragraph 8 does apply, the department should provide sufficient description of the nature of the contingency so that the reader understands the significance of its expected impact and that no liability is reflected in the accounts. An example of note disclosure for a material claim is:

"The department is named as a defendant in a suit alleging ..... The outcome of this claim is not determinable at this time. The potential financial impact of this case (is estimated to be in the range of $--- to $---) or (can not be estimated but could be significant). No accrual for this contingency has been made in the financial statements."

16. Departments with loan guarantees should disclose in their financial statement, information to describe the accounting policies selected and applied to loan guarantees including, the basis for initial recognition and measurement of the provision for losses on loan guarantees and the policies with respect to changes in the amount of the provision. Additionally, the nature and terms of significant classes of loan guarantees should be disclosed, including: the authorized limit, the principal amount outstanding, the amount of provision for losses and general terms and conditions.

17. An example of note disclosure for loan guarantees is as follows:

"Losses on loan guarantees are recorded in the accounts when it is likely that a payment will be made to honour a guarantee and where the amount of the anticipated loss can be reasonably estimated. The amount of the allowance for losses is determined by taking into consideration historical loss experience and current economic conditions. The increase or decrease in the allowance for loan losses between years is recorded to operating expenses. As at March 31, 2005, the department has guaranteed the following debt:

	Authorized Limit	Balance Outstanding
Loans under the XXX Act	$10,000,000	$8,500,000

Under the XXX Act, the department guarantees loans made by banks to farmers. The loans have a repayment term of between 5 to 10 years and are made at market interest rates. As at March 31, 2005, the department has an allowance for loan losses of $1,000,000 for these guarantees ($900,000 as at March 31, 2004).

18. An example of a note disclosure for contingent liabilities relating to contaminated sites is as follows:

"Liabilities are accrued to record the estimated costs related to the management and remediation of contaminated sites where the department is obligated or likely to be obligated to incur such costs. The department has identified approximately 50 sites (49 sites in 2005) where such action is possible and for which a liability of $20 million ($18 million in 2005) has been recorded. The department has estimated additional clean-up costs of $3 million ($1 million in 2005) that are not accrued, as these are not considered likely to be incurred at this time. The department's ongoing efforts to assess contaminated sites may result in additional environmental liabilities related to newly identified sites, or changes in the assessments or intended use of existing sites. These liabilities will be accrued by the department in the year in which they become known."

19. An example of a note disclosure for a contingent recovery is as follows:

"Last year, the department/agency completed audits at certain municipalities that had received grants to cover specific expenses related to the ABC program. As a result of the audits, it was evident that grants in excess of the amounts eligible had been disbursed. The department has not accrued a receivable as it is currently unable to estimate the amount of the overpayment."

20. Departments and agencies may have additional types of contingent liabilities that are significant to their operations. In these circumstances, disclosure should be made of the nature of the contingency and an estimate of the contingent loss or a statement that such an estimate cannot be made. Particular care should be taken in wording the disclosure of contingent liabilities that are confidential or sensitive in nature. Departments and agencies may wish to consult the Government Accounting Policy and Reporting Division of Treasury Board Secretariat for proposed note disclosure.