Contingent liability

Contingent liabilities also arise in reporting entity from the assumption of liabilities such as guarantees, warranties, or other guarantee agreements passed bills, if the balance sheet date is uncertain if and when they become real liabilities. As part of the debt crisis of Greece and other countries that the contingent liability of states comes to the forefront of discussion.

General

There are three forms of liabilities, namely the real liabilities, provisions and contingent liabilities. They differ mainly by the degree of probability on the accounting date of a payment obligation of each other. Arises from the contractual relationship with the creditor that a direct legal or economic unavoidable obligation and its fulfillment is an economic burden and is clearly quantifiable so there are real liabilities, which must be shown on the liabilities side of the balance sheet at their settlement amount ( § 266 paragraph 3 HGB ). The probability of repayment real liabilities is therefore 100%. Less likely is the payment obligation in respect of reserves because of these reason, the amount and / or timing is uncertain. The element of uncertainty concerns the amount, the existence or emergence of a liability; in precedent or resolution -related liabilities is not clear whether the condition occurs. However, uncertainty is not in the person of the creditor; an uncertainty about the due date according to the German Commercial Code plays no role, but results in accordance with IAS 37 also for recognition as a provision. If payment probability between > 50% and <100%, 253 para 1 HGB, provisions are to be formed in accordance with §.

Accounting for contingent liabilities

With a probability of the obligation to pay <50 % is according to contingent liabilities. This gradation of the probabilities corresponding to IAS 37 (contingent liabilities ). Of its content, are among the contingent liability those relationships in which the liable company is not direct debtors, but to stand next to a debtor or for the benefit of a debtor for the debt. Therefore must be assumed that the debtor primarily his own (real) will repay liabilities alone, so it will not even come to a liability case.

Therefore, legislators have decided in Germany and internationally, that contingent liabilities be recorded "in the balance " (§ 251 in connection with § 268 Para 7 HGB). "Under the balance sheet " means that they are not part of total assets and therefore not the balance sheet but must be listed below. Colloquially of " bottom line " is mentioned, special laws speak of the " off-balance sheet business " (§ 19 para 1 sentence 2 no 3 and 4 of the Banking Act ). This has the consequence that they do not belong to the liabilities and therefore reduce computationally neither the equity ratio nor the net worth of a company. Achievement in non-banks, the liabilities more than 50 % of the equity, then this liability position are classified as questionable.

Types of contingent liabilities

Specifically, 5 AktG ( old version ), the following basic forms of contingent liabilities enumerated in § 151 para:

• Liabilities from the issuance and transfer of bills,
• Liabilities under guarantees, bill and check guarantees,
• Liabilities arising from warranty agreements,
• Liability arising out of the provision of collateral for third party liabilities.

For the payment of a bill liable under Article 28 WG in addition to the drawee at least another of the exhibitors, so that the legislature has decided to assign the AC and endorsements contingent liabilities. If an entity guarantees, warranties or other warranty liability, it is primarily the debtor from these transactions payment obligation; the same goes for the "hard " letter of comfort. A warranty contract is an independent balance law term that everyone not recognized as a guarantee for qualifying contract by which the obligation is incurred that it guarantees a particular outcome or a service or for the non-occurrence of a particular disadvantage, as far as hereby may be connected to a charge on assets.

Particularity with banks

For credit institutions contingencies play a special role. According to § 26 RechKredVO contingent liabilities to credit institutions are defined by exact enumeration. According to § 26 paragraph 2 RechKredVO include Ausbietungs and other guarantee commitments, mandatory letters, irrevocable letters of credit, including related ancillary costs and Letters of credit and acknowledgments in the visa requirement contingent liabilities. They must be recorded in full, unless earmarked compensating balances are reported under the item " Liabilities to credit institutions" ( liability item # 1 ) or the line item " other liabilities to customers " (liability item No. 2 b ) for them. Paragraph 3 deals with the " liability arising out of the provision of collateral for third party liabilities ". These include equitable liens, chattel and deposits for third-party liabilities and liabilities from the provision of liens on movables and rights as well as from mortgages for third-party liabilities. Is such a liability of a guarantee or a warranty contract, only this is to be noted, in the sub-item letter b " Liabilities from guarantees and indemnity agreements ." All acquired from banks bank guarantees are therefore among the contingent

Contingent liabilities of a State

In the public debate, the assumption of liability by States, in particular the Federal Republic of Germany, moved in favor of highly indebted European countries in the foreground. Compared to liability acquiring companies is at States the peculiarity that their budgets are prepared cameralistic and to the extent not subject to the double-entry accounting provisions of the Commercial Code. Pure households consist of revenue and expenditure, ie cash payment flows. However, the assumption of liabilities, such as the guarantee liability in favor of Greece, is initially not cash out because of the warranty arises no immediate obligation to pay. Guarantees included in the budget, therefore, only if they are taken advantage of, so if a country becomes insolvent and its creditors demand payment from the guarantee. Such warranties of Federal must have a legal basis.

Legal basis for such liability is which entered into force on 8 May 2010 Monetary Union Financial Stability Act ( WFStG ) and the stabilization mechanism law. Required credits are granted by the KfW Banking Group and guaranteed by the Federal Republic of Germany. Both laws contain authorizations that the government is entitled to take over guarantees for loans to Greece to get its solvency ( § 1 para 1 WFStG ).

Contingencies are for States, however, not peculiar, because the hedged by the State under the Export Credit Insurance exporter risks are accounted for as contingent liability of the State. Under the so -called authorization procedure, the entire coverage of the state export credit insurance in the federal budget is set annually. Up to a certain sum of Euler Hermes is allowed to make autonomous as so-called Mandateur the Indeckungnahmen, in addition, a " Interministerial Committee for export guarantees and export guarantees ( IMA) " to decide. Since the Mandateur works on behalf and for the account of the State, the Indeckungnahmen are to be considered as a contingent liability in the federal budget.

Utilization

Can not or will not pay the debtor primarily committed and threatens serious risk of a claim, it is imperative for companies to make a passivation as a provision for contingent liabilities ( § 249 paragraph 1 sentence 1 HGB). Then that is available to the creditors - depending on the design of the warranty contract - a directly enforceable claim against the liable company. Thus, the first contingent move one step higher in the reserves and are thus part of the balance sheet total. Finally, a threat of immediate use of the assumption of liability, an identity as real liabilities pursuant to § 266 paragraph 3 HGB is charged on the balance sheet date.