Guarantees

[Namuna]

Hello,

Do the guarantees issued by the bank such as performance guarantee or counter-guarantee fall on the scope of IFRS 9? How are guarantees accounted for under IFRS?

[Marek Muc]

Please provide more details about these guarantees

[Namuna]

Performance Guarantee is issued by a bank to a contractor to guarantee the the full and due performance of the contract. If the performance is not done as per the contract, the bank us liable to pay the amount of performance guarantee.

Counter Guarantee is a guarantee is issued by a bank on behalf of a debtor to another bank on behalf of a contractor (beneficiary).

[Marek Muc]

The first question to ask is whether these are financial guarantee contracts as defined by IFRS 9:

‘A contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due …”

As I understand, a performance guarantee does not meet this definition. I’m not sure about the counter guarantee – does it meet this definition?

Financial guarantees are accounted for under IFRS 9 as specified here:
https://ifrscommunity.com/knowledge-bas ... -contracts

The performance obligation may meet the definition of an insurance contract, but careful analysis is needed. Insurance is not covered in our knowledge base and I won’t be able to elaborate on this in detail, but you will easily find quality publications online.

If it is not financial guarantee contract or insurance contract, then it is a contingent liability accounted for under IAS 37.

[Namuna]

In that case, I guess the counter-guarantee also does not fall in the scope of IFRS 9 because it's same as the performance guarantee. The difference is, instead of the beneficiary, the guarantee is given to the beneficiary bank.

Thanks a lot.

[Marek Muc]

I see, my second thought is that IAS 37 doesn't apply here as this is a contractual agreement, so probably the last resort is to treat it as a derivative under IFRS 9. It seems to be an interesting topic, I will look into it in the near future and add it to the knowledge base

[Marek Muc]

promised follow-up viewtopic.php?t=1548