International Board Proposes Financial Instruments Guidance

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By David R. Jones

A company that issues a financial guarantee for a subsidiary would have several accounting options for treating the guarantee in the parent company’s separate financial statements, under draft guidance the International Accounting Standards Board released June 26.

A financial guarantee issued by the parent entity is a contractual right of the bank to receive cash from the parent company if the subsidiary defaults.

The proposal seeks to clarify how a parent company applying international financial reporting standards would prepare its financial statements that are distinct from those of its subsidiaries if it applies IASB’s IFRS for small and medium-sized entities (SMEs).

The draft guidance from IASB’s SME Implementation Group (SMEIG)—an IASB advisory panel—addresses how a parent entity that guarantees a loan repayment from a bank to one of its subsidiaries would account for the financial instrument guarantee in its separate financial statements.

Accounting for Financial Guarantee

SMEIG received an inquiry about the accounting treatment for a parent entity issuing a financial guarantee on behalf of a subsidiary and said the same concern might emerge in different situations.

“An example of where this might commonly arise is an entity issuing a financial guarantee on behalf of another entity where both entities are under common control,” according to the draft guidance.

Two Options

In response, the implementation group proposed two options for how a parent company could treat the guarantee in its financial statements:

  •  applying the requirements in section 12 of IFRS for SMEs; or
  •  recognizing and measuring the guarantee under International Accounting Standard 39: Financial Instruments: Recognition and Measurement, as permitted in IFRS for SMEs.
Comments on the guidance will be accepted through Sept. 1, 2017.

To contact the reporter on this story: David R. Jones in London at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

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