Reporting Requirements for Annual Financial Reports of State Agencies and Universities
Notes & Samples
NOTE 15 – Contingencies and Commitments
Sample (Illustrative, may not tie to exhibits)
Unpaid Claims and Lawsuits
As of August 31, 20CY, certain lawsuits were pending against the state and/or Sample Agency. The lawsuits, which may present contingent liabilities, are displayed below.
| Claimant/ Plaintiff |
Defendant Name |
Type of Litigation |
Damages Sought |
Probability of Liability |
Possible Loss |
|---|---|---|---|---|---|
| Jane Smith | Agy/Branch | Workers Comp | $ 1,000,000 | Very Likely | $500,000 |
| Description of Case Plaintiff alleges workers’ compensation retaliation in violation of the Texas Labor Code and the Texas Constitution. |
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| John Doe | Name | Discrimination | $ 25,000 | Likely | $ 25,000 |
| Description of Case Plaintiff alleges discrimination, wrongful termination and retaliation in violation of Title VII and the Texas Labor Code. |
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| Sam Jones | Name | Tort Claim | $ 33,000 | Probable | Unknown |
| Description of Case Plaintiff alleges violation of the Texas Tort Claims Act (TTCA) as a result of an automobile accident. |
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| Numerous (15) | Name | Contract | $11,300,000 | Probable | Unknown |
| General Description of Cases Describe the cases with most significant amount of damages. |
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Federal Assistance
Sample Agency receives federal financial assistance for specific purposes that are subject to review or audit by the federal grantor agencies. Entitlement to this assistance is generally conditional upon compliance with the terms and conditions of grant agreements and applicable federal regulations, including the expenditure of assistance for allowable purposes. Such audits could lead to requests for reimbursements to grantor agencies for expenditures disallowed under the terms of the grant. Based on prior experience, management believes such disallowance (if any) will be immaterial.
Arbitrage
Rebatable arbitrage is defined by Internal Revenue Code, Section 148, as earnings on investments purchased with the gross proceeds of a bond issue in excess of the amount that would have been earned if the investment were invested at a yield equal to the yield on the bond issue. The rebatable arbitrage must be paid to the federal government.
Sample Agency monitors its investments to restrict earnings to a yield less than the bond issue and, therefore, limit any arbitrage liability. Sample Agency estimates that rebatable arbitrage liability (if any) will be immaterial to its overall financial conditions.
Derivative Instruments
All of the agency’s derivative instruments include provisions that require the agency to post collateral in the event its credit rating falls below “AA” as issued by Fitch Ratings and Standard & Poor’s or “Aa” as issued by Moody’s Investors Service. The collateral is to be in the form of U.S. Treasury securities in the amount of the fair value of hedging derivative instruments in liability positions net of the effect of applicable netting arrangements. If the agency does not post collateral, the hedging derivative instrument may be terminated by the counterparty.
At Aug. 31, 20CY, the aggregate fair value of all hedging derivative instruments with these collateral posting provisions is $4,230,000. If the collateral posting requirements had been triggered at Aug. 31, 20CY, the agency would have been required to post $1,340,000 in collateral to its counterparties. The agency’s credit rating is AAA/Aaa; therefore, no collateral has been posted at Aug. 31, 20CY.
Investment Funds
As of Aug. 31, 20CY, the Sample Agency entered into capital commitments with investment managers for future funding of investment funds. Investment funds include:
- Hedge fund pools
- Private investment pools
- Public market funds
- Other alternative investments managed by external investment managers
As of Aug. 31, 20CY, the remaining commitment was $1,000,000.00.