Strategic commercial interventions: assurance playbook

Contingent Liabilities

What is it?

A contingent liability is a potential liability that may or may not occur, depending on the result of an uncertain future event, not wholly within the entity’s (i.e. Scottish Government (SG)) control. The relevance of a contingent liability depends on the probability of the contingency becoming an actual liability, its timing, and the accuracy with which the amount associated with it can be estimated.

The most common real-life example of a contingent liability is a product warranty, however in the context of SG’s strategic commercial assets this could be legally enforceable undertakings given in the form of a guarantee or indemnity which would bind SG into providing the resources in the event of either of these maturing.

A contingent liability is recorded in SG’s accounts if the contingency is probable and the related amount can be estimated with a reasonable level of accuracy.

What is its purpose?

The Scottish Public Finance Manual (SPFM) sets out in detail how to identify, handle and report a Contingent Liability (CL). It is crucial that with any transaction Strategic Commercial Assets Division (SCAD) undertakes, it considers whether a CL has been created.

The creation of a CL could arise through both financial and non-financial support. Crucially, as set out in the SPFM, there is a statutory requirement to notify or seek approval from Parliament (Via the Finance and Constitution Committee) for CL’s depending on whether they meet the appropriate threshold.

Further detail on the identification and handling of CL’s is provided in the link to the SPFM above.

When should it be used?

A quarterly commission is issued by the Financial Management & Reporting Division which sits within Central Finance. This will include a list of previously reported live CL’s that have been reported by SCAD. The following actions must be taken by the respective sponsorship teams within SCAD, coordinated by the Programme Management Office function:

• Review all entries for your area within the log and ensure the details against each line are accurate and up to date. Amend, as necessary.
• If liabilities are closed off, mark appropriately to confirm no longer live.
• If liabilities have partly crystallised, please enter both the amount paid and the remaining balance. Note that the liability assessment will require discussion with central finance contacts.
• Add any new CL that have been created to the log.
• Update contact details where required.
• Once reviewed, please note as such with the relevant date, even if there is no change to the details reported.

The above instructions have been included for context but any updates to these will be issued at the same time as the commission.

To ensure the correct process is being followed in relation to CL’s, the relevant Finance Business Partner should be consulted as early as possible.

Useful Resources

Contingent liabilities - Scottish Public Finance Manual - gov.scot (www.gov.scot)

CLCC guidance - Charging for Guarantees and Indemnities - UK Government Investments (UKGI)