In business accounting, there are three degrees of “promises”: liabilities, provisions and contingent liabilities. Their definitions are the following.
a. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential.
b. A provision is a liability of uncertain timing or amount.
c. A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
In the SNA, liabilities and provisions relating to financial instruments are generally recognized in the main accounts only if there is a corresponding financial asset of equal value held by a counter-party. However, it is recommended that certain provisions that do not satisfy this criterion, such as those for non-performing loans, should be recorded as memorandum items. Contingent liabilities are not recognized at all in the core accounts, except in the case of standardized guarantees.
The problem is that recognition of a reduction in the value of an asset in the SNA necessarily implies a reduction in the corresponding liability but the asset holder may not wish to reveal to the counter-party the fact that they regard some of the claim as uncollectable. Not doing so however overstates the value of the assets.
|
