Hello Silvia Thank you for the clarification in the accounting of financial guarantees. If no commission is charged to the subsidiary and it has not benefited from interest rate advantages, that is, there is a difference between the market interest rate and the interest rate on the financial guarantee issued by the loan. Is the fair value of the security considered null and void? Most bonds are covered against default by a financial guarantee company (also known as a single-line insurer). The global financial crisis of 2008-2009 hit financial guarantee companies particularly hard. It left many financial guarantors with billions of dollars of bonds that had to be repaid on defaulting mortgage securities, and this led to a decline in the solvency of financial guarantee companies. Hello Silvia, If our business owner gives a guarantee of his personal account (the bank only pledges his account for the amount of the guarantee, but does not take a cash margin) to get a performance guarantee for the company`s project, how are we going to record it in our finances. If there is a guarantee of a DC overdraft system, the subsequent measurement would be PVTPL. Hello Silvia, Hello! What will be the accounting treatment in the debtor`s books if it is reversed, i.e. the financial collateral arrangement was issued to an unaffiliated party? Please note the details below: > Hermes Covered > Bank pays the guarantee premium to Hermes > The guarantee premium can be used to pay the loans Hello Silvia, Thank you for this amazing platform. I have a scenario where a customer has purchased a bond that comes with claims that may come from customers in their daily activities. There is no interest in the bond.
After six months, they renew the bond. How should this be reflected in the annual financial statements? Recognizing the need to develop a “stable platform” of standards for 2005, the Board decided to finalize IFRS 4 without specifying the accounting for these contracts, and then to develop separate proposals on this aspect. As part of the finalization of IFRS 4, the IASB also decided: Hello Suman, well, bank performance guarantees, in other words – performance obligations are contracts that meet the definition of an insurance contract under IFRS 4, so they should be accounted for under IFRS 4. Hi Silvia, if the financial guarantees provided by the main company A to subs B, the subs C lend money (Subs B & C is 100% owned by parent company A), from the consolidation financial statements of parent company A, then do we have to account for the financial guarantees? Thank you in advance. Easily learn about financial modeling and valuation in Excel with step-by-step training. Guarantee of the parent company for the bank loan of a subsidiary which reimburses the bank for the losses incurred if the subsidiary does not pay. Hello, I work in a bank and according to IFRS9 it is necessary to register ECL for various debt instruments, including the financial guarantees we have issued to our clients. My question is that the guarantees are not unbalanced, and the price is based on commissions – for example, you charge the customer a quarterly commission of 2%. How can I calculate the EIR (effective interest rate) for this? Hi Silvia, How would we classify a loan guaranteed by parents? Is it guaranteed or not from the point of view of the individual finances of the subsidiary and from the point of view of the consolidated financial statements? Thank you Hari Hello Silvia, what about the case of the subsidiary? they have to pay the financing guarantee? A financial guarantee does not always cover the full amount of liability. For example, a financial guarantor can only guarantee the repayment of interest or principal, but not both. Sometimes several companies register as a party to a financial guarantee. In these cases, each guarantor is usually only liable for a proportionate part of the case.
In other cases, however, guarantors may be liable for the shares of other guarantors if they fail to discharge their responsibilities. The company has provided a guarantee with 0 Premium, but with a scheduled monthly payment, which starts from the month following the signing of the warranty contract. Does this mean that when my warranty is first recognised, the FV is equal to 0 and the ECL must be fully recognised in my P&L? And yes, your listeners are right – you have to take this guarantee into account in some way. The buyer`s bank, in turn, may require the buyer to deposit the funds necessary for the purchase with the bank. A bank may also provide a so-called performance or guarantee guarantee, which essentially guarantees that the goods made available to a buyer will be delivered as promised and delivered as contractually agreed with the seller. The bank gave a loan, but we, the parent company, had to guarantee that we would pay the debt in case our subsidiary did not pay. Often, the guarantee is issued free of charge within the group, as in today`s question. The lender may simply require a contractual obligation from the parent company to cover the repayment of the debt if necessary, or it may require the parent company to pledge assets as collateral for the loan. A company involved in a joint venture can vouch for a debt instrument even if it is financially much larger and financially sound than its joint venture partner.
Based on your example above regarding the parent company that provides its subsidiary with a financial guarantee for the bank loan, what happens to the capital contribution part when the financial guarantee is derecognised if the bank loan has been repaid by the subsidiary? Are you assessed in accordance with IAS 27 and IAS 37? A common example of financial security is when an insurance company provides such security for bonds issued by a company for financing purposes. The insurance company ensures that bond buyers recover their capital investment and interest owed to them, even if the bond-issuing company defaults. For example, even if there were only a 5% probability that a loss could occur, this possibility must be included in the calculation of the ECL, whereas under IAS 37 no provision would be made because the loss is not likely. This means that if the “highest of” test is applied, the depreciation of the ECL is likely to be greater and accounted for earlier than IAS 37. In cases where the underlying borrower is in a sound financial position, or where the presence of collateral or other credit enhancements could either prevent default or reduce the amount of the loss incurred, the depreciation of the ECL may not be very significant. .