IFRS IC agenda decision on guarantees issued on obligations of other entities
At its April 2025 meeting, the IASB endorsed a further Interpretations Committee decision, on the accounting treatment of guarantees issued by an entity to cover the obligations of a joint venture.
The question submitted to the Committee concerns the separate IFRS financial statements of an entity that guarantees the payment obligations of a joint venture to various counterparties, such as a bank, a customer or another third party. The request asks whether the guarantees issued are financial guarantee contracts to be accounted for in accordance with IFRS 9 and, if not, which other IFRS standards apply to these guarantees.
The Committee first made a number of observations: entities issue guarantees on the obligations not only of their joint ventures but also of other entities, such as associates, subsidiaries or third parties. These guarantees come in a variety of terms and conditions. Questions relating to their accounting treatment arise both in the context of an entity’s separate financial statements and in consolidated financial statements.
The Committee notes that this is a matter of judgment, depending on the differing facts and circumstances. In making that judgement, an entity is required to analyse all terms and conditions - whether explicit or implicit - of the guarantee, unless those terms and conditions have no substance.
The Committee then reviewed the provisions of each potentially applicable standard in turn.
Does the guarantee meet the definition of a financial guarantee contract under IFRS 9?
IFRS 9 defines a financial guarantee contract as ‘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’. If it meets this definition, the guarantee falls within the scope of IFRS 9 by default, unless the entity explicitly designates it as an insurance contract in accordance with IFRS 17. This option is authorised contract by contract, under IFRS 9.2.1.(e)(iii). Noting that the term ‘debt instrument’ in the definition of a financial guarantee is not defined, the Committee noted that there was diversity in practice regarding its interpretation.
Does the guarantee meet the definition of an insurance contract under IFRS 17?
If the guarantee is not a financial guarantee contract within the scope of IFRS 9, the entity considers whether it is an insurance contract in accordance with IFRS 17.
This standard defines an insurance contract as ‘a contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder’. The Committee added that entities should consider the scoping requirements in paragraphs 3–13 of IFRS 17, which may, depending on the circumstances, include or exclude certain contracts that would otherwise meet the definition of an insurance contract.
Other accounting standards that might apply
If a guarantee is neither a financial guarantee contract nor an insurance contract, other standards may apply.
For example:
- the guarantee might be within the scope of IFRS 9 if it is a loan commitment, a derivative, or otherwise meets the definition of a financial liability as defined in IAS 32;
- if the counterparty to the guarantee is a customer, IFRS 15 might apply;
- finally, IAS 37 may apply if the guarantee gives rise to a provision, contingent liability or contingent asset that is not within the scope of any other standard.
Conclusion
The Committee concluded that an entity should apply judgement in interpreting the meaning of the term ‘debt instrument’ when determining whether a guarantee is accounted for as financial guarantee contract under IFRS 9.
It also recalled that the IASB had decided at its April 2024 meeting to consider the broader application questions related to financial guarantee contracts in a future consultation, including the meaning of the term ‘debt instrument’ in the definition of a financial guarantee contract.
The Committee concluded that the existing provisions of IFRS standards provide an adequate basis for an entity to determine how to account for a guarantee that it issues.
Want to know more?
Tippawan Pumbansao Audit Partner - Bangkok
