of embracing the new accounting framework, this article attempts to demystify some of the significant impact areas on account of adoption of Ind AS on financial services companies. This is more of an anti-abuse mechanism to check divergence of funds to promoters by the borrower. Following would not qualify as financial guarantee contracts under Ind AS 109: (a) Warranties issued by a manufacturer, dealer, or retailer, since it is not in respect of debt instrument; (b) Residual value guarantees, since there would not be due to loss incurred due to failure to pay. If the consideration is not receivable upfront but on different time intervals than entity has to discount the cashflow receivables to determine the NPV which will be the fair value on initial recognition and financing component (i.e. You would amortize it straight-line over 5 years (just for simplicity) and the entry would be: Debit Liabilities from financial guarantees: CU 200 (1 000/5); Credit Profit or loss – Income from financial guarantees… In consolidated financial statements of H  group, there would be no impact as it would be eliminated as an inter company transaction. All financial assets and liabilities are measured initially at fair value under Ind AS 109. Very well written. For example, if there is a guarantee with respect of default in payments under operating lease agreement (for example, of a civil aircraft) would qualify as a financial guarantee. Therefore, fair value based on independent pricing of commission should ideally factor in both these factors. If a contract requires payments in response to changes in a specified credit rating or credit index, these are not financial guarantees under Ind AS 109. Company A defaults to discharge the instalment due, c. Company B shall only pay to the extent of loss incurred by bank C & any subsequent recoveries from Company A shall be repaid to Company B. If H is called on to honor the financial guarantee obligation, H will have to increase the value of the obligation to that amount and book a P&L charge. How are financial guarantees accounted for under Ind AS? The ICAI may wish to clarify whether this view would sustainable under Ind AS. The financial liability is a financial guarantee … If the financial guarantee contract was issued to an unrelated party in a stand-alone arm’s length transaction, its fair value at inception is likely to equal the premium received, unless there is evidence to the contrary. Financial Guarantee Contract: A contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Although a financial guarantee contract meets the definition of an insurance contract in Ind AS104 if the risk transferred is significant, the issuer applies this Standard. What is a financial guarantee contract under Ind AS 109? (Input for Lifetime ECL PD: 40% and LGD: 75%), Lifetime ECL = Exposure at Default (EAD) * Loss given default (LGD) * Probability of Default (PD), a. In other words, for a financial guarantee contract, the entity is required to make payments only in the event of a default by the debtor in accordance with the terms of the instrument that is guaranteed. Subsequent measurement – Higher of an amount determined based on the expected loss method (as per guidance in Ind AS 109) or the amount originally recognised less, the cumulative amount recognised as income in accordance with Ind AS 115, Revenue from Contracts with Customers. A debt instrument has not been defined, but it would seem to be a broader term. Classification and measurement of financial assets Classification of financial assets under the Indian … US GAAP exempts following type of financial guarantees from being accounted for: - A guarantee issued either between parents and their subsidiaries or between corporations under common control, - A parent’s guarantee of its subsidiary’s debt to a third party (whether the parent is a corporation or an individual), - A subsidiary’s guarantee of the debt owed to a third party by either its parent or another subsidiary of that parent. As per Ind AS 109, the expected credit loss on the financial guarantee contract will be determined using ‘General approach’, as per the approach the financial guarantee contract must be classified into stage 1 on initial recognition. of Ind AS104 if the derivative is not itself a contract within the scope of Ind AS104. This has been used by many Indian companies under Ind AS and is also in line with international practices. How do you determine the fair value of financial guarantees? Accounting for financial guarantee contracts Ind AS 109, Financial Instrumentsincludes within its scope, an issuer’s rights and obligations arising under an insurance contract that meets the definition of a financial guarantee contract. These exemptions do not exist under IFRS or under Ind AS. Ind AS 103 Business Combinations: 5. Unit 2: Ind AS 34: Interim Financial Reporting; Unit 3: Ind AS 7: Statement of Cash Flows; Chapter 3: Ind AS 115: Revenue from Contracts with Customers; Chapter 4: Ind AS on Measurement based on Accounting Policies. The IASB believed that not accounting for such guarantee obligations would stand the risk of material liabilities from being accounted for. This would perhaps be the closest surrogate for independent guarantee commission. Their accounting treatment does not depend on their legal form. advance from customer and it is financing the issuer) which indicate thatit contain a significant financing component in the contract and hence as per the requirement of Ind AS 115, an entity shall present the effects of financing (i.e. Inr 126,000,000, B to subsidiary may not qualify AS financial guarantee contract on. ) separately from revenue from contracts with customers in the statement of profit and loss, who have yet! 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