Chapter 21 - Contingent Liabilities - Financial Policy Documents

Questions concerning this policy chapter should be directed to:

2101 Overview

This chapter establishes the Department of Veterans Affairs’ (VA) financial policies regarding recognition, accounting, and reporting of contingent liabilities. Contingencies are existing uncertainties that may have a financial impact, depending on future events that pose a possibility of loss to VA.

Key points covered in this chapter:

VA will recognize the contingency as a liability when a past event or transaction has occurred and a future outflow or other sacrifice of resources is probable and measurable;
VA will disclose contingent liabilities based on guidance from Federal Accounting Standards Advisory Board (FASAB), the Office of Management and Budget (OMB), and the U.S. Department of the Treasury (Treasury) at interim and fiscal year-end reporting periods; and
VA will prepare and submit the interim and final Legal Representation Letters (LRLs) and accompanying Management Schedules as required by OMB, Treasury, the U.S. Department of Justice (DOJ), and the U.S. Government Accountability Office (GAO).

2102 Revisions

Section	Revision	Office	Reason for Change	Effective Date
210505	Requirement to record settlement obligations timely and concurrently with contingency removal from accounting system	OFP (047G)	Settlement agreement represents binding legal liability (even if estimated)	April 2024
Various	Completed full policy review	OFP (047G)	To reflect current legislation and processes	November 2023
2103	Updated definitions	OFP (047G)	For consistency with other policy chapters and to align with SFFAS 12	November 2023
2104	Updated Roles and Responsibilities	OFP (047G)	To reflect current duties	November 2023
2105	Updated policy statements	OFP (047G)	Increase to unasserted claims reportable threshold to $10M and $100M individually and in the aggregate respectively	November 2023
Appendix A	Updated Memorandum Inquiry for Unasserted Claims	OFP (047G)	2023 Memo updated from previous 2018 memo disseminated to Administrations and Staff Offices	November 2023
Appendix B	Updated Memorandum for Management Representation Letter	OFP (047G)	2023 Memo updated from previous 2018 memo disseminated to OGC Management, Planning & Analysis	November 2023

See changelog for previous policy revisions.

2103 Definitions

Contingency – An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an entity that will ultimately be resolved when future events occur or fail to occur. Resolution of the uncertainty may confirm a gain (i.e., acquisition of an asset or reduction of a liability) or a loss (i.e., loss or impairment of an asset or the incurrence of a liability.

Contingent Liability – A liability that is both probable and measurable, representing a possible future outflow or other sacrifice of resources that is recognized for financial statement reporting purposes.

Legal Representation Letter – A representation in the form of a letter from the Office of General Counsel (OGC) to the financial statement auditor which is used to corroborate the accuracy and completeness of litigation, claims, and assessments reported in the financial statements.

Liability – A probable future outflow or other sacrifice of resources as a result of past transactions or events.

Measurable – Reasonably estimable.

Medical Malpractice – A legal cause of action that occurs when a medical or health care professional deviates from standards in his or her profession, thereby causing injury to a patient.

Nonrecognized Events – Subsequent events that provide evidence with respect to conditions that did not exist at the end of the reporting period but arose subsequent to that date. These events should not result in adjustment of the basic information or required supplementary information (RSI). Some of these events, however, may be of such a nature that their disclosure in basic information or RSI is required to keep the basic information or RSI from being misleading.

Non-Tort Claim – All claims other than tort claims.

Probable – That which can reasonably be expected or believed to be more likely than not on the basis of available evidence or logic, with the exception of pending or threatened litigation and unasserted claims. For pending or threatened litigation and unasserted claims, the future confirming event or events are likely to occur.

Reasonably Possible – The chance of the future events occurring is more than remote but less than probable.

Recognize – To formally record or incorporate an item into an entity’s financial statements as an asset, liability, revenue, expense, etc.

Recognized Events – Subsequent events that provide additional evidence with respect to conditions that existed at the end of the reporting period and affect the estimates inherent in the process of preparing basic information and RSI.

Remote – The chance of the future event(s) occurring is slight.

Subsequent Events – Events or transactions that affect the basic information or required supplementary information and occur after the end of the reporting period but before the financial report is issued. A subsequent event may affect a contingency by providing information that resolves an uncertainty related to a contingent liability and confirm the impairment of an asset or incurrence of a liability as of the end of the reporting period.

Tort – A civil wrong or wrongful act, whether intentional or accidental, from which injury occurs to another for which courts impose a liability. Torts include negligence cases as well as intentional wrongs that result in harm.

Unasserted Claims – Claims that are known or expected but, for which the injured party or potential claimant has not yet provided official notification to VA.

2104 Roles and Responsibilities

Under Secretaries, Assistant Secretaries, Other Key Officials are responsible for ensuring compliance with the policies outlined in this chapter.

Administration and Staff Office Chief Financial Officers (CFOs) or Directors are responsible for identifying and providing the Office of Financial Reporting (OFR) with all unasserted claims within their jurisdiction and for cooperating with OGC in determining the likelihood that VA will incur a loss related to the claims.

Office of General Counsel (OGC) is responsible for determining VA’s loss contingencies, documenting said contingencies via case forms, preparation of the LRL and providing information to OFR and the external financial auditors on contingencies.

Office of Inspector General (OIG) is responsible for submitting the interim and final LRLs and subsequent event updates to Treasury’s Fiscal Service, DOJ, and GAO.

Office of Financial Reporting (OFR) is responsible for recording and reporting VA’s contingent liabilities; preparing the LRL request, the LRL Management Schedule; and the memorandum for unasserted claims.

2105 Policies

210501 General Policies

VA will comply with following authorities to estimate, record, and report contingent liabilities:
- FASAB Statement of Federal Financial Accounting Standards (SFFAS) 5, 12, and 39;
- OMB Circular A-136 and related bulletins;
- Treasury Financial Manual (TFM) 4700; and
- GAO Financial Audit Manual

210502 Unasserted claims and the Legal Representation Letter

VA will collect information to identify and estimate the potential loss for each unasserted claim and existing case through the LRL process which starts at the end of June and runs through the middle of January the following fiscal year.
To begin the process, OFR will prepare and distribute an unasserted claims memorandum to Administrations and Staff Offices CFOs/Directors. The memorandum will provide guidance in identifying unasserted claims against VA that could result in an unfavorable outcome exceeding applicable reporting thresholds (currently $10 million dollars individually or $100 million dollars in aggregate). Appendix A contains a sample memorandum.
OFR will gather all unasserted claims obtained from Administrations and Staff Offices and submit those claims, with the request for the LRL, to OGC. Appendix B contains a sample LRL request memorandum.
OGC will review the unasserted claims and the pending or threatened litigations.
OGC will use case forms to document its review of pending or threatened litigation, unasserted claims, and litigation that is no longer pending.
Case forms will include the nature of the case, the progress of the case, the estimated amount or range of potential loss to VA and the likelihood of unfavorable outcome (rated as: probable, reasonably possible, and remote).
OFR will review the case forms received from OGC for accuracy and completeness and resolve any discrepancies with OGC.
OGC will prepare a draft LRL disclosing an estimate of the likelihood of an unfavorable outcome and an estimate (or a range) of the amount of potential loss for each claim or potential claim.
OGC will draft the LRL and send the draft to OFR. OFR will review the information and provide comments to OGC if corrections and clarifications are needed.
OFR will prepare the interim and final LRL Management Schedule summarizing the content of the LRLs.
OGC will send the year-end LRL to OFR and the financial statement auditors by the established deadline to facilitate the audit process.
OIG will submit the interim and final LRLs and Management Schedules to Treasury’s Fiscal Service, DOJ, and GAO adhering to the submission dates in TFM Chapter 4700.

210503 Estimate of Contingent Liabilities

In accordance with SFFAS 5 and 12, when a loss contingency exists, VA will estimate the possibility of the loss and recognize the contingency (if it meets the recognition criteria) as a contingent liability in its financial statements.
VA will estimate contingent losses for medical malpractice, other tort claims, and non-tort claims reported in the LRL.
1. The liability arising from medical malpractice and other tort claims is based on an actuarial estimate.
2. The liability arising from non-tort cases in the LRL is based on the estimated losses reported by the Office of General Counsel (OGC).

210504 Accounting for Contingent Liabilities

VA will recognize a contingent liability when a past transaction or event has occurred, a future outflow or other sacrifice of resources is probable, and the related future outflow or sacrifice of resources is measurable.
VA will record contingent liabilities in the interim and fiscal year-end accounting periods. The amount recorded represents the estimated value of probable loss and will be adjusted periodically based on changes in estimates.
As part of VA’s third quarter reporting process, VA will record contingent liabilities arising from items such as medical malpractice, other tort claims and non-tort claims.
1. To record the contingent liability arising from medical malpractice and other tort claims, OFR will review the actuarial estimated range of the contingent loss from VA’s actuarial team and select the amount representing the best estimate within the range or the minimum amount of the range if there is no best estimate.
2. To record and calculate the amount of the estimated non-tort claim liability from the LRL in the financial statements, OFR will input the likelihood and estimated amount of the contingent loss into the interim LRL Management Schedule and calculate the amount that will be recorded via journal voucher.
3. OFR will record contingent liabilities via a journal voucher in VA’s financial reporting system at the interim reporting period. Refer to Volume II, Chapter 1A – VA Journal Vouchers for additional information on processing journal vouchers.
As part of VA’s fiscal year-end reporting process, VA will review and record or adjust contingent liabilities:
1. If the fiscal year-end actuarial estimate shows a significant difference from interim reporting for the medical malpractice, and other tort claims, OFR will record a journal voucher to account for the difference.
2. If the final LRL Management Schedule’s calculation yields a significant difference from interim reporting of non-tort claims for the cases in the LRL, OFR will record a journal voucher to account for the difference.
3. OFR will record the adjustment via a journal voucher in VA’s financial reporting system at the year-end reporting period.
OFR and OGC will retain sufficient evidence for the time period required according to National Archives and Records Administration (NARA) statutes to support that the contingent loss is probable, and the dollar amount of the loss is reasonably estimated.

210505 Accounting for Settled Claims/Obligation Process

The Administrations and Staff Offices will record an obligation when a settlement becomes final, or a court judgment is issued for settlements. The obligation must be recorded at the time the settlement or court determination occurs, even if the recorded obligation is an estimate of VA’s maximum potential liability.
OGC, in consultation with the Administrations/Staff Office will complete the “No Longer Pending Case Form” to indicate the case has settled or an adverse judgement was received. In addition, the Administrations/Staff Offices will provide OFR with the obligation number and the Finance POC. OGC will advise Administrations/Staff Offices of their responsibility to provide the obligation number and Finance POC to OFR.
In the event the liability amount is unknown based on the “No Longer Pending CaseForm,” OFR will notify the FSC who will work with the Administrations/Staff Offices to record an on-the-top adjustment/journal voucher for the budgetary obligation at VA’s maximum potential liability.
Upon receiving the “No Longer Pending Case Form,” and obtaining evidence of the obligation in iFAMS or FMS, OFR will remove the contingent liability as appropriate.
The FSC must work closely with the Administrations/Staff Offices to periodically (at least annually) determine if adjustments are needed to the on-the-top adjustments based on current year payments.
OFR and OGC will retain sufficient evidence for the time period required according to National Archives and Records Administration (NARA) statutes to support that the contingent loss is probable, and the dollar amount of the loss is reasonably estimated.

210506 Reporting of Contingent Liabilities

The reporting and disclosure of contingent liabilities is dictated by the materiality of the potential loss and the degree of probability that the loss may occur.
VA will report contingent liabilities in accordance with OMB Circular A-136, and (SFFAS) 5,12, and 39. Specifically, VA will:
1. Report contingent liabilities meeting the conditions for liability recognition at the estimated amounts on the consolidated balance sheet.
2. Disclose a contingent liability in the notes to the financial statements if the likelihood of the contingent loss is at least reasonably possible. The disclosure will include at a minimum:
  - The nature of the contingency;
  - An estimate or an estimated range of the possible liability, or a statement that such an estimate cannot be made; and
  - Information about the potential effect of litigation on VA’s financial position.

210507 Subsequent Events Review

Subsequent events may bring additional evidence that changes the probability of contingencies. If the subsequent events have a material effect on the potential liability, VA will record and disclose the effects of the change in accordance with the guidance in SFFAS 5, 12, and 39. Specifically, OFR will adjust the consolidated balance sheet and/or accompanying notes as needed.
OGC will provide OFR with any updates or changes to the cases/claims that occurs between the final LRL date to the publication date of the Agency Financial Report (AFR) which is normally November 15.
OFR will review the updates and determine if any of the updates qualify as a subsequent event, defined as having a material influence on VA’s AFR.
OGC will provide an updated LRL after the completion of OFR’s review, sending the updated LRL to the financial statement auditors as requested.
OIG will notify Treasury’s Fiscal Service, DOJ, and GAO via email of any subsequent changes in the likelihood or amount of loss for cases that arise after the final LRL through the date determined in the TFM Year-end Closing Bulletin for publication of the government-wide financial statements.

2106 Authorities and References

2107 Rescissions

Volume VI, Liabilities, Chapter 21 – Contingent Liabilities dated November 2023.

2108 Policy Approval

This policy was approved by the VA Chief Financial Officers’ Council on April 18, 2024.

Appendix A: Sample Memorandum to Administrations and Staff Offices

Enclosed is an example from FY 2023. The memorandum is revised annually according to updated requirements and deadlines.

Department of Veterans Affairs
Memorandum

Date: 6/20/2023

From: Associate Deputy Assistant Secretary for Office of Financial Reporting (OFR)

Subj: Independent Inquiry of Unasserted Claims for the FY 2023VA Legal Representation Letter to (auditor)

To: See Addressee List

1. In connection with the audit of the consolidated financial statements of the Department of Veterans Affairs (VA) as of September 30, 2023, our independent (auditor), is requesting information on “unasserted claims”, which VA believes could result in an unfavorable outcome in an amount that is equal to or over $10,000,000 individually or $100,000,000 in the aggregate.

2. Unasserted claims relate to matters which in Management’s opinion should be sent to the General Counsel to receive a legal assessment concerning the likelihood of an unfavorable outcome. Excluded from this reporting requirement are tort claims and matters for which a claim has already been threatened or asserted. Regional Counsel can provide guidance as to whether a matter has resulted in a threatened or asserted claim.

3. Multiple responses are required for audit purposes. The initial response should be sent to OFR (designated point of contacts) no later than (NLT) June 30, 2023 and should include matters that existed as of June 30, 2023. The second response is due to OFR NLT October 2, 2023, and should include matters that existed as of September 30, 2023. The final response should be sent to OFR before January 19, 2024 and include matters that existed as of January 19, 2024. This last response date is tentative and will be adjusted based on GAO established deadlines related to their audit of the consolidated U.S. financial statements.

Due Date	Period Covered
6/30/2023	As of 6/30/2023
10/2/2023	7/1/2023 – 9/30/2023
1/19/2024	10/1/2023 – 1/19/2024

4. Responses should include the following information for all matters:

a) The Station number, City and State where the unasserted claim originates;

b) The approximate amount, if known, of the unasserted claim, and when it came to your attention as a potential unasserted claim;

c) The issue generating the unasserted claim (e.g., contract dispute);

d) The person(s) or entity likely to assert the claim;

e) POC (VA official) who can provide information about each unasserted claim; and

f) The VA four-digit fund account that the claim would be paid from in the event of an unfavorable outcome.

5. Negative responses are required.

6. Please do not hesitate to contact OFR (designated point of contacts) directly at (email, phone), if you have any questions about this request.

________

(name), Associated Deputy Assistant Secretary for Office of Financial Reporting (OFR)

Addressees:

Chief Financial Officer, Veterans Benefits Administration (24)

Chief Financial Officer, Veterans Health Administration (10A3)

Chief Financial Officer, National Cemetery Administration (42)

Director, Franchise Fund Oversight Office (047F)

Director, Financial Services Center (104)

Executive Director, Office of Acquisition, Logistics and Construction (003)

Director, OI&T Financial Management and Oversight Service (005F1)

Appendix B: Sample Request of the Legal Representation Letter

Enclosed is an example from FY 2023. The memorandum is revised annually according to updated requirements and deadlines.

Department of Veterans Affairs
Memorandum

Date: 6/20/2023

From: Associate Deputy Assistant Secretary for Office of Financial Reporting (OFR)

Subject: Independent Audit of the FY 2023 Financial Statements

To: Director, OGC Management, Planning and Analysis (026)

1. Pursuant to 31 U.S.C. § 3521, (auditor) is auditing the financial statements of the Department of Veterans Affairs (VA) for the year ended September 30, 2023. The auditors comply with Government Auditing Standards, issued by the Comptroller General of the United States (the Yellow Book) when performing audits of Government entities. For financial statement audits, Government Auditing Standards incorporate the fieldwork and reporting standards of the American Institute of Certified Public Accountants (AICPA) and the Statements on Auditing Standards that interpret them. Consistent with the AICPA’s AU-C Section 501 Audit Evidence – Specific Considerations for Selected Items (including Litigations, Claims and Assessments), (auditor) is requesting supporting documents pertaining to litigations, claims and assessments, including the financial accounting and reporting of such matters in the financial statements. The purpose of this letter is to request your assistance in responding to that inquiry. The American Bar Association Statement of Policy Regarding Lawyers’ Responses to Auditors’ Request for Information (December 1975) provides guidance for the lawyer’s response to the auditor’s request.

2. In accordance with Statement of Federal Financial Accounting Standards (SFFAS) No. 5, Accounting for Liabilities of the Federal Government, as amended by SFFAS No. 12, and Interpretation No. 2 of SFFAS No. 4 and 5, VA might be required to report certain information in its financial statements and accompanying note disclosures concerning contingent liabilities for litigations, claims and assessments. We request you provide (auditor) (with a copy to OFR) information on matters to which you have been engaged and have devoted substantive attention on behalf of VA in the form of legal consultation or representation.

3. Your initial response should include matters that existed as of June 30, 2023 and be submitted to OFR by July 3, 2023. The interim Legal Representation Letter (LRL) should be forwarded to OFR and (auditor) by July 24, 2023 with finalized case summary information. We expect to receive Unasserted Claims information from the Administrations and Staff Offices as of June 30, 2023 by June 30, 2023. We will provide this information to you by COB on June 30, 2023.

4. For fiscal year-end, a response is required for the September 30, 2023 audit of VA’s consolidated financial statements that will be issued on November 15, 2023, and the GAO audit of the consolidated U.S. financial statements which will be issued no later than February 15, 2024. Your response as of September 30, 2023 should be provided to OFR by October 3, 2023 and the representation letter to OFR and (auditor) by October 20, 2023. We expect to receive updated Unasserted Claims information from the Administration and Staff Offices as of September 30, 2023 on October 2, 2023. We will provide this information to you by COB on October 2, 2023.

5. Subsequent responses should be sent to OFR and (auditor) by November 13, 2023 for the period covering October 1, 2023 to November 12, 2023, and before November 15, 2023 for the period from November 13, 2023 to November 15, 2023. The final response should be sent to OFR and (auditor) before January 23, 2024 for the period of November 16, 2023 through January 19, 2024. These responses may be submitted via e-mail, versus a formal letter.

6. Key due dates are summarized in the table below.

Due Date	Due		Period Covered
Due Date	From	To	Period Covered
6/30/2023 (unasserted claims)	Admins’ CFOs; Franchise; FSC; OALC; OIT	OFR	As of 6/30/2023
6/30/2023 (unasserted claims)	OFR	OGC
7/3/2023 (case forms)	OGC	OFR
7/24/2023 (signed LRL)	OGC	OFR & (auditor)
10/2/2023 (unasserted claims)	Admins’ CFOs; Franchise; FSC; OALC; OIT	OFR	7/1/2023 – 9/30/2023
10/2/2023 (unasserted claims)	OFR	OGC
10/3/2023 (case forms)	OGC	OFR
10/20/2023 (signed LRL)	OGC	OFR & (auditor)
11/13/2023	OGC	OFR	10/1/2023 – 11/12/2023
11/15/2023 (VA AFR date)	OGC	OFR & (auditor)	11/13/2023 – 11/15/2023
1/23/2024 (Subsequent Events)	OGC	OFR	11/16/2023 – 1/19/2024

7. Please include any cases[1] with respect to which you have been engaged and have devoted substantive attention on behalf of VA in the form of legal consultation or representation, even those cases for which you believe the potential loss may be paid by the Judgment Fund or some financing source other than VA’s budgetary resources. Under U.S. generally accepted accounting principles, these amounts will be included as liabilities or disclosed in VA’s financial statements. Please aggregate cases similar in nature as described in GAO’s Financial Audit Manual (FAM), Section 1002.18 and Section 1002.19. Please list the matters in order of the amount of potential loss, starting with the largest.

Pending or Threatened Litigation (excluding unasserted claims):

(auditor) has determined that any matters for which the amount of potential loss equals or exceeds $10,000,000 individually or $100,000,000 in the aggregate could be material to the financial statements. Please provide to (auditor) the information described below on pending or threatened litigation where the amount of potential loss equals or exceeds $10,000,000 individually or $100,000,000 in the aggregate:

The nature of the matter. Include a description of the case or cases and amount claimed, if specified.
The progress of the case to date.
The government’s response or planned response (for example, to contest the case vigorously or to seek an out-of-court settlement).
An evaluation of the likelihood of unfavorable outcome. Please categorize likelihood as probable (an unfavorable outcome is likely to occur), reasonably possible (the chance of an unfavorable outcome is less than probable but more than remote) or remote (the chance of an unfavorable outcome is slight).
An estimate of the amount or range of potential loss, if one can be made, for losses considered to be probable or reasonably possible.
The name of VA’s legal counsel handling the case and names of any outside legal counsel/other lawyers representing or advising the government in the matter (Department of Justice or outside law firms).
The VA four-digit fund account that the claim would be paid from in the event of an unfavorable outcome.

We also request that you identify litigations reported in your prior year legal representation letter as pending or threatened but is no longer pending or threatened with a short description of the disposition.

Unasserted Claims and Assessments:

Please provide the following information for all unasserted claims and assessments that you consider to be probable of assertion and which, if asserted, would have at least a reasonable possibility (more than remote) of an unfavorable outcome in an amount that equals or exceeds $10,000,000 individually or $100,000,000 in the aggregate, involving matters to which you have devoted substantive attention:

A description of the nature of the matter.
The government’s planned response if the claim is asserted.
An evaluation of the likelihood of an unfavorable outcome. (Categorize likelihood as probable (likely to occur) or reasonably possible (less than probable but more than remote).
An estimate of the amount or range of potential loss, if one can be made.
The VA four-digit fund account that the claim would be paid from in the event of an unfavorable outcome.

8. Please specifically confirm to (auditor) that our understanding of the following is correct: In the course of performing legal services for us, with respect to a matter that involves an unasserted possible claim or assessment that may require a financial statement disclosure, if you formed a professional conclusion that we should disclose or consider disclosing such possible claim or assessment, as a matter of professional responsibility to us, you will (1) advise us of your conclusion and (2) consult with us concerning the question of such disclosure and the applicable requirements of SFFAS No. 5, as amended.

9. Please describe the cases using the Department of Justice forms (one for pending or threatened litigation and another for unasserted claims). The current forms are located at their Web site at https://www.justice.gov/forms.

10. Please separately identify any cases with respect to which you have been engaged and to which you have devoted substantive attention on behalf of VA in the form of legal consultation or representation for which you believe another government entity will be responsible for any potential liability. Please specifically identify the nature of and reasons for any limitations on your response to this request.

11. Please address your response to the auditor’s designated point of contact at (fax, phone, and email). You may also contact the auditor’s designated point of contact at (alternative phone) when your reply is available for pick up by (auditor) with a copy to OFR.

12. Please do not hesitate to contact OFR directly if you have any questions about this request. OFR designated point of contacts at (phone, email).

_________________

(name), Associate Deputy Assistant Secretary for Office of Financial Reporting

[1] This includes any cases that do not seek monetary damage awards but would require the government to use financial resources to implement remedies or actions sought by litigation or unasserted claims (for example, to increase the scope of, or change to a more costly methodology of, environmental restoration and cleanup).

[3] This includes any cases that do not seek monetary damage awards, but would require the government to use financial resources to implement remedies or actions sought by litigation or unasserted claims (for example, to increase the scope of, or change to a more costly methodology of, environmental restoration and cleanup).