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Identifying unexpected liabilities – nonexchange financial guarantees

Authored by Amanda Mboga

With the negative financial impacts of the COVID-19 pandemic affecting many industries, governments may, for the first time, find themselves in a position where they are required to pick up payments under financial guarantees made in previous years. If your government has extended a nonexchange financial guarantee to another entity or individual, you should complete an analysis of the likelihood that payment will be required. The threshold for recognizing a liability is “more likely than not,” meaning that the likelihood is greater than 50% that the government will need to make payments under the guarantee at some point in time.

Some factors to consider in your analysis include:

  • Bankruptcy or financial reorganization
  • Violation of debt covenants
  • Other indicators of financial difficulty, such as failure to make timely payments, significant investment losses, loss of major revenue source, etc.
  • Historical data on the default frequency of similar guarantees

Additional footnote disclosures are also required.

Additional guidance on nonexchange financial guarantees can be found in the Governmental Accounting Standards Board (GASB) Codification Section N30—Nonexchange Financial Guarantees, paragraphs .105–.107, .111, and .113.

For more information on this topic, or to learn how Baker Tilly public sector specialists can help, contact our team.

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