Contingent liabilities & bank guarantee (In a general sense)

[Huzaifa]

Is bank guarantee a contingent liability & is it supposed to be disclosed as per IAS 37 in the financials if this bank guarantee has been given by the bank for the company whose financials are being prepared, also this bank guarantee is not provided for any contract with the customers.

[JakobLavrod]

Can you provide more details on the guarantee? Is the bank guaranteeing a specific loan?

[Huzaifa]

This bank guarantee has been taken against the share capital that needs to be maintained mandatorily as per the local laws of UAE - The amount that the bank has guaranteed is AED 3,000,000. Should this be considered a contingent liability & disclosed in the notes to the financial statements?

[JRSB]

I don't understand the arrangement to be honest! The bank is giving a guarantee that share capital will be maintained, what is the bank getting from it?

[DJP]

It is a contingent liability under IAS 37. You should disclose it, unless the probability is deemed remote.

@JRSB -- this seems to be a performance bond. Banks usually charge a hefty fee to provide this type of guarantees, and should the guarantee be exercised, the bank will have a claim over the entity for the amount disbursed.

[JRSB]

ok interesting. is that upfront fee an asset amortised over the life of the guarantee?

also if this was the UK, then the chance of share capital falling below a required level (and the guarantee being called) would probably be considered remote; but maybe in UAE it varies by external factors or something.

[DJP]

Yes, I would expect the fee to be amortised over the life of the guarantee