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Treatment of Bank Guarantee Charges

CA Viral Haria (PROPRIETOR) (170 Points)

08 May 2010

Bank Guarantee has been obtained by a company for a period of 5 years. Can the bank guarantee charges be deferred over a period of 5 years or will we have to treat it as a revenue expenditure and debit the whole cost to P&L??

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17 Replies

Sneha (SERVICE ) (417 Points)
Replied 08 May 2010

Shoudl be treated as revenue expenditure for that year and to be accounted for in the same year.

Jag Bhushan Sharma (Faculty in a B-School) (633 Points)
Replied 08 May 2010

I think the total expenses should be amortanised equally over the period of five years for which bank guarantee has beeen obtained because the total expenses do not belong only to the year in which bank guarantee has been secured.

sanjay sahni (Service) (21 Points)
Replied 08 May 2010

Generally such type of BGs are in nature of performace guarantees to cover the warrantee/contract liability periods.

The revenue is booked in the year in which transation is invoiced (as per AS 9 or AS 7)and like wise the expense is captured in the books of accounts. Similarly, the provision for warranty is also provided for in the same year.

Applying same logic (Matching principal concept) the Bank Guarantee cost is to be charged off in the year in which it is incurred.

Sanjay Sahni

vikash rathi (Chartered Accountant) (787 Points)
Replied 08 May 2010

shall be treated as revenue expenses....shall be charged in the same year....

m.suresh (finnace ex) (22 Points)
Replied 08 May 2010

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AMIT KUMAR VERMA (CA Final(new Course)) (32 Points)
Replied 08 May 2010

dear bank gauarantee obtained by the company for the period of five year on which company have to pay commission. as per AS 9 revenue recognition the income is recognize on period basis when bank gives guarantee they shows their coomission on quater basis hence the company also show such amount of expenses in number of years in which the company takes guarantee.

Birender Singh (Consultant) (19 Points)
Replied 08 May 2010

i think wenk bank charge as commission andv book his income in one year then why expenses in not booked for one year

CA SHABIR (CA) (336 Points)
Replied 09 May 2010

Respected All,

First of all, banks do not issue BGs for the period exceeding one year (as per my knowledge, I may be wrong). If any way it has been issued for 5 year, the commission paid on its acquisition should be dealt according to AS 26 issued by ICAI. As per said AS, any expenditure is worth capitalization if it satisfies following conditions:

1. It must be the result of past event

2. It must be controlled by the enterprise

3. Future economic benefits must accrue to the enterprise

I believe the query satisfies all the conditions and should be capitalized and amortised over its usefull life

Hope explanation is found satisfactory

Thanks

1 Like

GIRISH NADKARNI (GM FINANCE) (52 Points)
Replied 09 May 2010

If the bank has debited bank guarantee commission for the entire 5 years period, the next 4 years commission should be treated as prepaid expenditure and onl current period charge will be taken as expenditure to P & L Account. Our company is in the contracting business and we issue such guarantees on regular basis.

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chetan Loknathka (student) (102 Points)
Replied 12 June 2010

According to AS 9 ISSUED BY ICAI when expenses are booked accruerly basis and bank charges are is inclue as a revenue expenses but my knowledge that bank bank charges against the total expenses should be amortanised equally over the period of five years.

CHETAN LOKNATHKA

RB Maurya (Student) (71 Points)
Replied 12 June 2010

This is right that total Bank Charge on Bank Guarantee will be debited in P&L A/c in Current Year

work is worship (Service) (2728 Points)
Replied 13 June 2010

Yes it would be treated a revenue exps and debited to Profit and Loss as

a) the bank guarantee charges are debited by bank over a period and not in totality for the entire period of guarantee.

b.) Secondly , the bank guarantee has to be renewed every year and it is normally only for 1 year , only this is it may be spread over two financial years.