Do we need to account for bank guarantee commission recovered by bank on accrual principle i.e. if validity of bank guarantee is two years, charges need to be booked pro-rata over the validity period. I understand there is judgement which says the bank guarantee commission can be fully booked to expenses as soon as incurred.
Please help.
K Venkatraman
Dear Mr. K Venkatraman,
With regards to your query, Bank Charges / Commission paid while issuance of Bank Guarantees are to be accounted for in the year in which the same is incurred. There is no need to consider the Bank charges for the above mentioned transaction as Prepaid Expenses even though the benefit of the BG is for period beyond a particular financial year.
The reply is in accordance with generally accepted accounting treatment in this regard in industry.
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