Hi, I have a few questions related to cash collateral. A company pays an amount called cash collateral to an insurance company. The insurance company issues bonds in favor of clients of the group the company belongs to. The cash collateral is used as guarantee for the issued bonds. There is no direct link between the cash collateral and the issued bonds, which means that if (up to a certain level) new bonds are issued, there is not always an increase of the cash collateral necessary. The company also has placed an amount in a blocked bank account, which is used by a bank to issue bonds.
The issue is how to treat these collaterals under IFRS 9, as there is no direct link between the maturity of the bonds and the collateral. As a result, it looks like it is not possible to make any amortized cost calculation as there is no contractual maturity for the cash collateral. The cash collateral has no agreed end date. The contract states that it ends (amongst others) when there are no bonds left under the guarantee. Also, is the accounting treatment of the blocked bank account different from the cash collaterals paid to insurance companies?
Your input is much appreciated.
Valuation of cash collateral
Re: Valuation of cash collateral
I guess you need to somehow estimate the time horizon and estimate the fair value accordingly. Any delays in repayment vs expectations will be recognised as impairment. In separate financial statements of the parent, the difference between cash paid and fair value of collateral receivable can be recognised as an additional investment in respective subsidiaries.
See also this page:
https://ifrscommunity.com/knowledge-bas ... collateral
See also this page:
https://ifrscommunity.com/knowledge-bas ... collateral
Re: Valuation of cash collateral
I suppose one should also consider/factor the risk of not getting it back at all in a default scenario - presumably it is requested initially to mitigate counterparty risk.
Re: Valuation of cash collateral
Thanks for your reply.
As I have been told, till now it has never been necessary to use the bonds. We deliver quality products
As I have been told, till now it has never been necessary to use the bonds. We deliver quality products