Accounting for Financial Guarantees under INDAS!

In simpler terms, a financial guarantee is a commitment by one party (the guarantor) to take responsibility for another party's debt or financial obligation in case the borrower defaults. This assurance provides a level of security to the lender or holder of the debt. Due to this financial guarantee by the entity, lender agree to provide the loan to the borrower at normal interest rates (Instead of higher interest rates) Financial Guarantees play a critical role in the financial landscape, providing assurance and security to transactions. But what about their accounting treatment under INDAS? Let's dive deeper into the financial realm to understand this vital aspect:

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Accounting treatment Financial Guarantee:-

1?? Initial Recognition:

Entity shall initially recognize financial guarantees (It is a financial liability) at present value(P.V) of interest savings to borrower over the period discounted using the ‘Interest rate without guarantee’

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Debit the same amount as receivable from borrower or special A/c(if any special relationship exists b/w parties)

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Journal entry at initial recognition

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Receivable /Special A/c like investment in subsidiary

???????????????? To Financial guarantees

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P.V of interest savings is calculated as follows:

2? Subsequent Measurement:

(i)??At each year end, we have to show financial guarantees at fair value (since it is a financial liability measured at FVTPL)

???????? Fair value of financial guarantees at each year end is higher of

?????????????? P.V of remaining future interest saving to Borrower

?????????????????????? ????????or

Expected loss due to default by borrower(Loan amount taken by borrower * probability of default by borrower )

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(ii)?Difference in amount in step 2 & previously recorded amount of financial guarantees will be recognized as fair value gain/loss in P&L

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??????? Journal Entry

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??????? If fair value of financial guarantee increases:-

? ????????P&L

?? ????????To Financial Guarantees

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??????? If fair value of financial guarantee decreases:-

?????????? Financial Guarantees

???????????? To P&L

? 3.?? At Maturity

???????On Maturity of borrowing for which guarantees is given

???? If Borrower does not default:-

???? ???? Financial guarantees (Carrying amount)

?????????? ?? To P&L

????? IF Borrower defaults in repayment of borrowing:-

????? ????? Financial Guarantee (carrying amount)

????? ?????? P&L (B/F)

???????? ???????? To bank (Amount paid due to default)

?????????????? ?? To P&L (B/F)

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4.?? Disclosure

Clear, comprehensive disclosures are crucial. They provide insights into the ???nature and extent of financial guarantees, the risks involved, and how these guarantees impact the financial statements. Transparency is key! ?

Understanding of financial guarantee accounting is not just about compliance; it's about enhancing financial decision-making and stakeholder trust. It’s important to note that the accounting treatment for financial guarantees to a third party vs. related parties differs significantly.