CONTINGENT LIABILITIES
Contents:
Scope
Key Points
What is a contingent liability?
Appraisal
Prior approval of the Scottish Parliament
Record of Contingent Liabilities
Notification and Accounting
New statutory powers
Sponsored Bodies
Scope
1. This section gives guidance on the procedure to follow where a part of the Scottish Administration (including the core Scottish Executive and Executive Agencies) proposes to enter into an arrangement which could give rise to a contingent liability. Other bodies funded direct from the Scottish Consolidated Fund should ensure compliance with any relevant provisions and arrange for procedures consistent with the guidance to be put in place.
Key points
2. A most careful appraisal of the risks, including the legal aspects, should be carried out before accepting any contingent liabilities. In all cases steps should be taken to restrict the total contingent liability to a minimum.
3. The prior approval of the Parliament (via the Finance Committee) must be secured before entering into any specific guarantee, indemnity, or letter or statement of comfort unless:
- there is specific statutory authority; or
- it arises in the normal course of business; or
- the sum at risk is £1m or less.
4. If a liability matures the relevant business area should consider, in consultation with the relevant portfolio Finance Team, whether an immediate report should be made to the Parliament.
5. Business areas should be satisfied that there are adequate arrangements in force to ensure that acceptance of contingent liabilities by bodies sponsored by the Scottish Executive can, in the event of the contingent liabilities maturing, be met from within the bodies' own resources. Any contingent liabilities which the bodies might not be able to meet from within their own resources should be treated in the same way as the Executive's own contingent liabilities.
What is a contingent liability?
6. The accounting standard definition of a contingent liability is as follows:
- a possible obligation 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 entity's control; or
- a present obligation that arises from past events but is not recognised because it is not probable that a transfer of economic benefits will be required to settle the obligation; or the amount of the obligation cannot be measured with sufficient reliability.
7. However, the particular contingent liabilities addressed in this section are essentially legally enforceable undertakings given in the form of a guarantee or indemnity which would bind the Scottish Executive into providing the resources in the event of the guarantee or indemnity maturing; or a letter or general statement of comfort which could be considered to impose a moral financial obligation on the Executive. In this section the term also covers undertakings to meet costs resulting from a guarantee or indemnity which will inevitably arise in the future even though the amount and timing may be unknown.
Appraisal
8. A most careful appraisal of the risks, including the legal aspects, should be carried out before accepting any contingent liabilities. In all cases steps should be taken to restrict the total contingent liability to a minimum e.g. by carefully specifying the duration, the extent and the conditions attached to guarantees. Guarantees and indemnities should normally exclude any liabilities arising from negligence on the part of the indemnified body or of its contractors, agents or employees.
9. Where there is no statutory authority for accepting contingent liabilities the justification for doing so should be carefully considered. At the very least any expenditure resulting from such a contingent liability falling due must be able to meet the criteria for Expenditure without Statutory Authority.
Prior approval of the Scottish Parliament
10. Under the terms of a Written Agreement between the Scottish Executive and the Finance Committee of the Scottish Parliament the Scottish Ministers, before granting any non statutory guarantees or indemnities in excess of £1m (including those without limit), should present their proposals to the Finance Committee of the Scottish Parliament. This should take the form of a letter from the responsible Cabinet Secretary or Minister to the Convener of the Finance Committee. The letter should give particulars of the contingent liability and explain the circumstances including a full appraisal of the risk analysis process and any other options that have been considered. The letter should be prepared by the relevant business area in consultation with their portfolio Finance Team and the submission to the responsible Cabinet Secretary or Minister should be copied to the Cabinet Secretary for Finance and Sustainable Growth and the DCLO for the Finance Committee.
11. The Finance Committee will in turn consider the proposal within 20 days. That may involve taking evidence from relevant officials. The Committee will either approve the proposal or propose an amendment. The Scottish Ministers will either accept the amendment or notify the Committee that they disagree. It will then be for the Committee to decide to either allow the Scottish Ministers to proceed or to refer the matter to the Parliamentary Bureau for a debate.
12. Contingent liabilities of a standard type which arise as an unavoidable feature of an activity authorised by statute (e.g. those which arise in the normal course of business) are not covered by the need for prior parliamentary approval unless expenditure at a later date may be of such a nature or size that the Parliament should be given notice.
13. It should be noted that the test is what the Parliament can be expected to regard as normal course of business in the light of the activities which it has authorised. It follows that this category does not include any contingent liability resulting from a new service for which parliamentary authority does not exist.
14. Examples of contingent liabilities arising in the normal course of business are:
- contingent liabilities resulting from non-insurance. As a general rule the Scottish Executive only purchases commercial insurance where this would be more cost effective than non-insurance. Contingent liabilities resulting from non-insurance do not need to be reported where they arise in connection with activities for which parliamentary authority exists.
- contingent liabilities arising in the course of the purchase or supply of goods and services in the discharge of the Executive's business as authorised by the Parliament.
Record of Contingent Liabilities
15. Portfolio Finance Teams should be notified of all contingent liabilities to enable them to maintain a record of contingent liabilities and to assist with the compilation of notes to the annual accounts.
Notification and Accounting
16. Disclosure of contingent liabilities should be made in annual accounts in accordance with the Government Financial Reporting Manual, which applies Financial Reporting Standard 12. No separate report should therefore normally be necessary on the granting of contingent liabilities which do not require the prior approval of the Parliament. Where, however, a statute granting power to give guarantees or indemnities itself contains a requirement to report the using of the power, the statute must be complied with.
17. If a liability matures the relevant business area should consider, in consultation with the relevant portfolio Finance Team, whether an immediate report should be made to the Parliament. The report should explain the circumstances in which the liability has matured and the amount of money involved. Appropriate Budget Act authority should normally be secured before any associated expenditure is incurred but in cases of extreme urgency the Executive may seek the use of Ministers' contingency powers as set out in the section on Expenditure without Parliamentary Authority.
New statutory powers
18. Business areas contemplating proposing the seeking of new powers to give guarantees or indemnities (or otherwise to enter into contingent liabilities) must first consult the relevant portfolio Finance Team.
19. Given the disclosure requirements of resource accounts, it will not normally be necessary to include with such powers any requirement to report, specifically, the use of the power to the Parliament.
Sponsored Bodies
20. The contingent liabilities of bodies sponsored by the Scottish Executive are not normally under the direct control of the Executive. However, any contingent liabilities which the bodies concerned might not be able to meet from within their own resources could fall to the Scottish Executive. Sponsoring units within the Executive should therefore be satisfied that there are adequate arrangements in force to ensure that the acceptance of contingent liabilities by the bodies concerned is consistent with the bodies' defined powers and that, in the event of the contingent liabilities maturing, the bodies would have the ability to meet the costs from within their own resources. Any contingent liabilities which the bodies might not be able to meet from within their own resources should be treated in the same way as the Executive's own contingent liabilities.
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Page Published/ Updated: July 2007