Treatment of Bank Guarantee Charges

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

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.

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

hi very one

i have  information  how to cal to working contrack tax  ap vat.

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.

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

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

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

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

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.

If the banker is a foreign banker not covered under the Banking regulations act,1949, whether TDS is deductable on such charges. Pls clarify..

i am not asking bank guarentee charges, while preparing balance sheet if BG will disalloved how would be treat in balance sheet?