Arrangement Fees on Financial Guarantee Contract

[hubertd]

Hi Everyone,

We've just signed a FCG contract where the underlying debt is drawn in tranches over 9 months and then repaid in bullet after 7 years. Our cover follows this, so it grows to the total debt drawn over 9 months period and then stands flat until maturity (assuming no claims of course).

The arrangement fee payable by a borrower has been shared 50:50 between the covered lender and us - the guarantor. Paid upfront as 2% of £200m debt facility (so 1% for lender and 1% for guarantor) I'm wondering what would be the accounting treatment for this fee? I'm thinking of recognising it over a life of a cover but the question is: what should be the recognition pattern? Shall I do it on a straight-line basis or would anything else be more appropriate? Obviously, for debt products at amortised cost these fees are part of EIR. Any ideas?

[JakobLavrod]

IFRS 9.4.2.1 (c) writes that:
financial guarantee contracts. After initial recognition, an issuer of such a contract shall (unless paragraph 4.2.1(a) or (b) applies) subsequently measure it at the higher of:
(i) the amount of the loss allowance determined in accordance with Section 5.5 and
(ii) the amount initially recognised (see paragraph 5.1.1) less, when appropriate, the cumulative amount of income recognised in accordance with the principles of IFRS 15.

Hence the standard method is that as long as the initial fee amortized on a linear basis does not go below the ECL, straight line should work. However, I am not working with these types of products myself, so would love to hear someone else view

[hubertd]

The arrangement fee won't be reported as a guarantee liability. I will be receiving the regular 6 monthly guarantee fees which present value I will recognise as a guarantee liability in line with IFRS 9.4.2.1 (c). Arrangement fee is a different kind of fee. I've received it upfront and it's not refundable. In other words, even if the guarantee was to be stopped and de-recognised for any reason I won't be returning this fee. The next instalments of guarantee fees however won't be paid if the guarantee coverage stops.
Arrangement fee is similar to the origination fee received for debt products.