A contingent liability in budgetary terminology is identified when a transaction has occurred, and future outflow or other obligation of resources is probable, and such obligation may be measured.
An existing condition, situation, or set of circumstances that poses the possibility of a loss to an agency that will ultimately be resolved when one or more events occur or fail to occur. Contingent liabilities may lead to outlays. Contingent liabilities may arise, for example, with respect to unadjudicated claims, assessments, loan guarantee programs, and federal insurance programs. Contingent liabilities are normally not covered by budget authority in advance. However, credit reform changed the normal budgetary treatment of loans and loan guarantees by establishing that for most programs, loan guarantee commitments cannot be made unless Congress has made appropriations of budget authority to cover the credit subsidy cost in advance in annual appropriations acts. (See also Credit Subsidy Cost under Federal Credit; Liability.)
C. Contingent Liabilities
Up to this point in Chapter 7, we have discussed obligations: what they are and how and when to record them. As pointed out in the previous sections Liabilities of this chapter, the core attribute of an obligation recordable under 31 U.S.C. § 1501 is that it creates a definite legal liability on the part of the federal government. While the precise amount of the liability may be undefined initially, an “obligational event,” reflecting a definite liability, may occur even though the amount of the liability at that time is undefined. A “contingent liability” is fundamentally different. In contrast to a definite liability, a contingent liability does not create an obligation unless and until the contingency materializes.
Contingent liabilities take different forms depending on the circumstances. However, whatever form it takes, a contingent liability by definition lacks the definiteness that is essential to the concept of an obligation. Thus, GAO defines a “contingent liability” generically as “[a]n existing condition, situation, or set of circumstances that poses the possibility of a loss to an agency that will ultimately be resolved when one or more events occur or fail to occur.” 
Contingent liabilities are not recordable as obligations under section 1501 of title 31.  Rather, a contingent liability ripens into a recordable obligation for purposes of section 1501 only if and when the contingency materializes. E.g., 62 Comp. Gen. 143, 145–46 (1983); 37 Comp. Gen. 691– 92 (1958); GAO, Policy and Procedures Manual for Guidance of Federal Agencies, title 7, § 3.5.C (Washington, D.C.: May 18, 1993) (hereafter GAOPPM).
The contingent liability poses somewhat of a fiscal dilemma. On the one hand, it is by definition (and absent special statutory treatment) not sufficiently definite to support the recording of an obligation. Yet on the other hand, sound financial management may dictate that it somehow be recognized. Indeed, if completely disregarded, a contingent liability could mature into an actual liability and result in an Antideficiency Act violation. Agencies have a legal obligation to take reasonable steps to avoid situations in which contingent liabilities become actual liabilities that result in Antideficiency Act violations. This may include the “administrative reservation” or “commitment” of funds, as well as taking other actions to prevent contingencies from materializing.
For example, in B-238201, Apr. 15, 1991, the General Services Administration (GSA) was faced with a contingent liability that could become an actual liability. GSA was engaged in litigation concerning an Illinois statute authorizing the taxation of government property purchased under an installment contract. GSA had entered into arrangements to purchase buildings in Illinois on an installment basis, so there was a potential for tax liability, including back taxes, which would be assessed if the Illinois statute was upheld. Since the litigation was extending over fiscal years and the outcome was in doubt, GSA accrued amounts from the fiscal years involved as loss contingencies for the potential tax liability. GAO agreed with GSA’s approach and stated:
“Because the underlying legal liability of the Government has yet to be established, the potential tax liability of the [property] is not sufficiently definite to be recorded as an obligation. However, GSA has not actually obligated funds for this purpose, . . . Instead, in terms of fiscal operations, it is possible for GSA officials to have recorded the potential liability as a commitment through the budgetary account ‘Commitments Available for Obligation’ in the Standard General Ledger. This accounting procedure reflects allotments or other available funds which were earmarked in anticipation of a potential obligation and is used for purposes of effective financial planning.”
Id. See also 35 Comp. Gen. 185, 187 (1955) (GAO recommended reserving funds as a means to avoid potential Antideficiency Act violations from contingent liabilities involving pending litigation in cases where it was believed that claims against the government were meritorious).
In addition to the obligational accounting treatment of contingent liabilities, agencies need to be aware of the financial accounting treatment of contingent liabilities. Contingent liabilities may be sufficiently important to warrant recognition in a footnote to pertinent financial statements. 62 Comp. Gen. 143, 146 (1983); 37 Comp. Gen. at 692. See also Federal Accounting Standards Advisory Board, Accounting for Liabilities of the Federal Government, SSFAS No. 5, ¶¶ 35–42 (Dec. 20, 1995), as amended by SSFAS No. 12 (December 1998) (provides guidance on the appropriate accounting treatment of contingent liabilities in financial statements).
33 GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-05-734SP (Washington, D.C.: September 2005), at 35 (emphasis added).
34 Outside the framework of 31 U.S.C. § 1501, however, Congress has provided special treatment for certain contingent liabilities in order to better capture their budgetary impact. Most notably, the Federal Credit Reform Act of 1990, 2 U.S.C. §§ 661–661, changed the normal budgetary treatment of loans and loan guarantees by establishing that for most programs, loan guarantee commitments cannot be made unless the Congress has appropriated budget authority in advance to cover their estimated losses (known as “credit subsidy costs”). See Chapter 11, section B, for a detailed discussion of the budgetary and obligational treatment of loan and loan guarantee programs under the Federal Credit Reform Act.
35. See 7 GAO-PPM § 3.5.F; B-238201, Apr. 15, 1991 (nondecision letter).