Subsequent Measurement - Financial Guarantees IFRS 9

[IFRS2020]

I have a query in relation to financial guarantee liability accounting.

At initial recognition – a financial guarantee is initially recognised at FV, producing entries:

Debit: Premium receivable/Cash
Credit: Financial guarantee liability (in this case, unamortised deferred premium)

Subsequent measurement – it is measured at the higher of:

- IFRS 9 ECL on the financial guarantee; and
- Fair Value of the financial guarantee on day 1 less, when appropriate, the cumulative amount of income recognised in accordance with the principles of IFRS 15

My questions are:

- If ECL is determined to be higher at the subsequent measurement, what happens to the unamortised deferred premium? Would it entirely get released to P&L and be replaced with the ECL value? Or is the incremental ECL value added to the unamortised deferred premium to achieve the increase in the financial guarantee liability value?

For instance, if the unamortised deferred premium is £500 and ECL is £700, is it £200 that gets added to the deferred premium to reflect the Financial Guarantee liability at £700? or is the entire unamortised deferred premium of £500 replaced with the ECL amount of £700? If the ECL does replace the unamortised deferred premium, what happens to the unamortised deferred premium balance of £500, where does it go?

- If the financial guarantee liability continues to be subsequently measured at ECL, does the amortisation of the deferred premium still take place? If the amortisation continues, would it be released to P&L or does it take place off the system (i.e., in the background) to enable a comparison at subsequent measurement?

[Ketan Marwah]

Hi,

Sorry to draw you back to the old thread (previous post) but have you changed anything from your last post as I have answered these questions in the previous thread?

viewtopic.php?t=1323

From a quick glance the questions appear to be the same. Maybe you can point me towards something specific that you have changed from your previous post or would like to follow up on. Thanks.

[IFRS2020]

I do have follow-up questions.

- Is the incremental ECL value added to the unamortised deferred premium? For instance, if the unamortised deferred premium is £500 and ECL is £700, is it £200 that gets added to the deferred premium to reflect the FG liability at £700? or is the entire deferred premium of £500 replaced with the ECL amount of £700? If ECL replaces the deferred premium, what happens to the deferred premium balance of £500?

: You would amortize the amount of your financial guarantee in line with IFRS 15 Revenue from Contracts with Customers and as mentioned above that at the end of subsequent reporting period you would remeasure the financial guarantee at the higher of the two inputs which are also mentioned in your post in line with IFRS 9.4.2.1(c)

Follow-up question - if at the end of the subsequent reporting period, it is determined ECL is higher, then Financial Guarantee liability will be measured using ECL, so what would happen to the unamortised deferred premium?

[Ketan Marwah]

Hi,

Sorry but I don't follow your choice of nomenclature. I explained in my previous post that we are addressing financial guarantee's which is a financial liability and not deferred premium's. Deferred income is usually not a financial liability because it represents an obligation to deliver a good or service rather than cash or other assets in settlement so let's first try to get the nomenclature corrected.

You would remeasure the financial liability (the entire amount) at the higher of £500 & £700, which is obviously £700. Therefore the financial liability (financial guarantee) would stand revised at £700. Don't confuse yourself with accounting for just the incremental element. You are accounting for the entire financial liability which originally was £500 and now stand revised at £700. Don't forget to amortize £500 in line with IFRS 15 principles before you compare it with £700.

[IFRS2020]

Thanks, Ketan. That's very helpful.

[Ketan Marwah]

You are welcome and best of luck.