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Accounting Entry for Bank Guarantee invocation


Premnath (Manager)     20 January 2021

Premnath
Manager 
 22 points

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Hi,

 

Please clarify me how to book the entry for BG invocation as per IFRS.

CA Venkata Koteswararao Mogali

CA Venkata Koteswararao Mogali (job)     20 January 2021

CA Venkata Koteswararao Mogali
job 
 2 likes  45 points

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Let me explain this with an example, 

Suppose if my holding company (ABC Ltd) given guarantee on my behalf to my banker (XYZ Bank) for a loan of Rs 10 cr and i failed to repay the loan amount, then the banker have invoked the bank guarantee. 

The accounting entry will be as follows:

Loan (XYZ Bank) a/c Dr     10cr

           To ABC Ltd a/c                 10cr

 

yasaswi gomes

yasaswi gomes (My grammar is 💯 good I)     20 January 2021

yasaswi gomes
My grammar is 💯 good I 
 183 likes  3338 points

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Initial recognition- at fair value only of the financial guarantee with premium or without premium

with premium

Bank a/c

To Financial guarantee contract liabilities a/c

without premium

SPLOCI-PL a/c

To Financial guarantee contract liabilities  a/c

 

Subsequent measurement:

First amortise the financial guarantee contract, usually using straight line method. For 1000 loan guarantee over five years = 200₹

By financial guarantee contract liabilities a/c 200₹

To Income from financial guarantee a/c 200₹

Then, measure the financial guarantee at higher of :

  • The loss allowance determined as expected credit loss under IFRS 9 and 
  • The amount initially recognized (fair value) less any cumulative amount of income/ amortization recognized in line with IFRS 15.

if you calculate your ECL as 300, then you keep measuring the financial guarantee at 800₹ (1000₹ Minus 200₹) on your balance sheet. But due to fair value changes if the ECL is 1100₹, then recognise the loss in SPLOCI- PL 300₹ (1100₹ Minus 800₹). If the subsidiary completely fails to pay the debt, Write off the carrying amount as a loss.(ecl-ca)

the above answer suggests that liability is credited towards holding compan

 

yasaswi gomes

yasaswi gomes (My grammar is 💯 good I)     20 January 2021

yasaswi gomes
My grammar is 💯 good I 
 183 likes  3338 points

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I found a default entry and an example here: hope it helps you for reporting in holding company

https://www.bdo.nz/en-nz/accounting-alert-november-2018/accounting-for-financial-guarantees-under-ifrs-9


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