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SBR-Financial Guarantee Contracts Under IFRS 9

Financial guarantee contracts (IFRS 9)

Relevant to ACCA Qualification paper SBR

Financial guarantee contracts are within the area of IFRS 9 and this is considered as a financial liability. It is measured initially at Fair value of the guarantee provided and subsequently at each reporting date, it is measured at the higher of :

1. Amount of the loss allowance or
2. Amount initially recognized (amortized to recognize income)


Let’s say on 1 January 2016 CCA LTD gave a guarantee of a NPR.5m loan taken by its Subsidiary SSBGM.LTD.

SSBGM.LTD.was to repay the loan on four equal installment on 31 December 2016 in year 2016, 2017, 2018 and 2019.

The terms of the guarantee states that CCA LTD would be called on to repay the principal amount if SSBGM LTD. defaults on any of these payments.

The fair value of the guarantee at the date of inception of 1 january 2016 is assessed at NPR.1m

CCA LTD reporting date is 31 December.

Scenario 1

SSBGM LTD makes all payments in accordance with the terms of the loan.

CCA LTD would account for the guarantee as follows :

1 January 2016
DR. P/L 1m
CR. Liability 1m

31 December 2016, 2017, 2018 and 2019
DR. Liability 0.25m (1/4)
CR. P/L 0.25m

The guarantee has been initially recognized at fair value. The amortization of guarantee over its life here 0.25m each year reflects the recognition of income (through reduction of the liability) as the service is provided.

Scenario 2

SSBGM LTD makes its first installment payment on 31 December 2016 and then defaults in payment on 31 December 2017.

CCA LTD would account for the guarantee as follows :

1 January 2016
DR. P/L 1m
CR. Liability 1m

31 December 2016
DR. Liability 0.25m (1/4)
CR. P/L 0.25m

31 December 2017
DR. P/L 3m
CR. Liability 3m

( 5m loan – 1.25m(31 december 2016 repayment)-0.75m(remaining financial liability brought forward from year 2016)

I hope you get some ideas to help you to solve the questions relating to this area. This area was examined in the December 2014 sitting of the former P2 examinations. SBR is a higher level paper so demand you to show your higher level skills and knowledge to pass this paper.

Written by a member of BOD Team for CCA.


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