Accounting for Financial Guarantee - Ind AS - Indian Accounting Standards - Companies Law

Accounting for Financial Guarantee A financial guarantee is a contractual right of the lender to receive cash from the guarantor, and a corresponding contractual obligation of the guarantor to pay the lender, if borrower defaults. Here the financial guarantee may actualize in contingent circumstances therefore, it shall be constituted as financial instrument as per Ind AS 32. Recognition and Measurement These contracts should be recognised as financial liabilities as per Ind AS 109. However, if financial Instruments meets the definition of Insurance Contracts, then those will be covered under Ind AS 104 Insurance Contract . Initial Recognition These Contracts should be recognised as financial liability at fair value initially. Journal Entry Investment in Subsidiary A/c / Special A/c / Receivable A/c Dr. XXX To Financial Guarantee XXX Subsequent Recognition If Financial Guarantee Contract is designated as FVTPL, measure at fair value at every balance sheet date; and changes in fair value should be transferred to P L. Journal Entry If Fair Value of Financial Guarantee increases Profit Loss A/c Dr. XXX To Financial Guarantee XXX If Fair Value of Financial Guarantee decreases Financial Guarantee A/c Dr. XXX To Profit Loss A/c XXX On Maturity On maturity of borrowing for which guarantee was given In Case borrower has not defaulted JE Financial Guarantee A/c Dr. XXX To Profit Loss A/c XXX In case borrower has defaulted in repayment of borrowing JE Financial Guarantee A/c Dr. XXX Profit Loss A/c Dr. XXX (Balancing amount if any) To bank A/c XXX To Profit Loss A/c XXX (Balancing amount if any)