Policy References:

GASB Statement No. 70 – Accounting and Financial Reporting for Nonexchange Financial Guarantees

GASB Statement No. 10 - Accounting and Financial Reporting for Risk Financing and Related Insurance Issues (GASB Codification III, Specific Balance Sheet and Operating Statement Items, Section C50 – Disclosure for Loss Contingencies)

GASB Interpretation No. 6 - Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements (GASB Codification Section 1500 - Reporting Liabilities)

Process and Document Preparation:

COMMITMENTS

Commitments are agreements to perform in the future. Commitments consist of all obligations of the State for future fiscal years. Examples of commitments would include operating lease payments on real property. Problems in the area of commitments relate to recognition of expenditures in the proper period and disclosure of future payments.

Disclosure of commitments should include the nature, amounts and any unusual terms and uncertainties of the commitment.

CONTINGENCIES

A contingency represents a condition, situation or set of circumstances involving a possible loss that will ultimately be resolved when one or more future events occur or fail to occur. Examples of contingencies include audit disallowances, adverse litigation, actual or possible claims or assessments and guarantees of indebtedness to others. Loss contingencies are those that may result in the incurrence of a liability or the impairment of an asset. Consideration related to the determination of contingencies include: (1) whether a liability must be recorded; (2) when the liability will be paid; and (3) appropriate note disclosures.

The State's treatment of loss contingencies depends on two determinations:

1. Whether the likelihood of the underlying adverse event occurring is probable (likely to happen), the measurement point for all contingencies other than nonexchange guarantees; more likely than not to occur, (a likelihood of more than 50 percent), the measurement point for nonexchange guarantees; remote (unlikely); or possible (between probable and remote),
2. whether the loss can be estimated.

These determinations are frequently very difficult to make and require an informed judgment by the State based on the best information available before the release of the financial statements. Information to be considered in making these determinations includes the views of legal counsel and other experts, past experience of the State or others in similar situations, qualitative factors relevant to the entity that has issued the guaranteed obligations, and intentions of the State (whether, for example, an appeal of an adverse court decision will be made).

LOSS PROBABLE

When it is probable that a loss, asserted or unasserted, has been incurred at the balance sheet date, the loss (net of probable recoveries) should be accrued if there is a reasonable basis for estimating it. If only a range of loss can be determined, the best estimate within the range should be accrued; if none of the estimates within the range is better than another, the lowest amount of the range should be accrued. Estimates of loss must have a reasonable basis.

When a loss contingency has been accrued, the nature of the contingency, the amount of the accrual, and if appropriate, the possibility of further losses should be disclosed if doing so is necessary to prevent the financial statements from being misleading. The full amount of the loss contingency is accrued and reported in the Government-wide financial statements. When qualitative factors and historical data indicate that it is more likely than not that a government will be required to make a payment related to the nonexhange financial guarantees it extended for liabilities of other entities, the government should recognize a liability and an expense for the discounted present value of the best estimate of the future outflows expected to be incurred as a result of the guarantee in the Government-wide financial statements. That portion of the loss contingency that will be paid during the 12-month period following the reporting period ending date will be accrued and reported in the Governmental Funds in accordance with GASB Interpretation 6, for all contingencies, including nonexchange guarantees.

When the amount of a probable loss cannot be estimated and therefore no accrual can be made, disclosure should be the same as indicated below for possible losses.

LOSS POSSIBLE

When a loss is possible, but not probable, disclosure should be made of: (1) the nature and status of the contingency; (2) the estimated amount (or range) of the possible loss or a statement that an estimate cannot be made; and (3) other possible effects if not otherwise evident.

LOSS REMOTE

Disclosure generally is not required when the likelihood of a loss is remote, unless there is extreme materiality or unusual circumstances involved warranting the disclosure of such.

On the other hand, no adjustment should be made for events occurring after the balance sheet date that do not indicate that a liability had been incurred or an asset impaired at such date. An uninsured loss of a building due to a fire after year-end, for example, should not be accrued. Significant losses or loss contingencies of this type should be disclosed.

Certain contingencies should be disclosed in the financial statements even though the possibility of a loss may be remote. State guarantees of debt are included in this category as are commitments. Such commitments include accumulated unpaid leave, mandated assistance, assets pledged as security for loans, abandoned property receipts, Federal grant disallowances, and commitments such as those for property acquisition or an obligation to reduce debts.

To ensure that the reporting of commitments, contingencies and litigation likely to result in a loss are disclosed in compliance with GAAP, a formal system to identify and monitor such has been established. The Attorney General's Office is the primary source for the appropriate data pertaining to litigation and related contingencies. Other information should also be obtained from the Agency Financial Reporting Package (AFRP) which includes a section for disclosure of new contingencies or commitments along with confirmations of the status of previously reported matters. Commitments and contingencies reported to OSC through the AFRP should be cross-referenced to other sources to ensure that accruals, if any, for these items will not be duplicated.

Disclosure is required for the nature, timing and extent of the nonexchange financial guarantees, whether or not payment is required.

Guide to Financial Operations

REV. 01/01/2017