Entity guarantees over others’ obligations

What’s the issue?

The International Accounting Standards Board (IASB) has endorsed the IFRS Interpretations Committee (Committee) decision on the accounting treatment of guarantees issued by an entity to cover the obligations of a joint venture.

For this agenda decision, the Committee ultimately concluded that the existing requirements of the IFRS Accounting Standards provide an adequate basis for an entity to determine how to account for a guarantee that it issues, but in making this conclusion, helpful guidance and information has been provided as part of the staff papers and Committee’s analysis which sets out a useful framework, or step-by-step mapping, for assessing the requirements that should be considered when determining the appropriate accounting treatment for the guarantee contract.

What does this mean?

What was the question raised?

The question submitted to the Committee concerned 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 asked whether the guarantees issued are financial guarantee contracts to be accounted for in accordance with IFRS 9 Financial Instruments (IFRS 9) and, if not, which other IFRS standards apply to these guarantees.

What was the Committee’s analysis and conclusion?

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 with a variety of terms and conditions.
• Questions relating to the accounting treatment arise both in the context of an entity’s (issuers/grantors) separate financial statements as well as in the consolidated financial statements to which the issuer/guarantor is consolidated.

The Committee noted that determining the appropriate accounting treatment to be applied will be a matter of judgement, depending on the differing facts and circumstances of the guarantee in place (rather than based on the nature of the entity’s business activities, for example a guarantee contract might be in the scope of IFRS 17 Insurance Contracts, even though the entity does not otherwise enter into insurance business). 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 requirements of each potentially applicable IFRS Standard in turn.

Does the guarantee meet the definition of a financial guarantee contract under IFRS 9 Financial Instruments (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 specific 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 Insurance Contracts. This option is permitted on a contract-by-contract basis, under IFRS 9.2.1. (e)(iii), but once elected is irrevocable.

The term ‘debt instrument’ in the definition of a financial guarantee, however, is not defined, and this has resulted in diversity in practice as to how the definition should be applied to certain guarantee contracts, i.e. a guarantee that does not relate to a bank loan. The Committee therefore noted that an entity should apply judgement in interpreting the meaning of the term ‘debt instrument’ when assessing if the definition is met under IFRS 9.

It should also be noted that the IASB 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 context of the financial guarantee contract definition, so further guidance will hopefully be issued in this area in the future.

Does the guarantee meet the definition of an insurance contract under IFRS 17 Insurance Contracts (IFRS  17)?

If the guarantee is not a financial guarantee contract within the scope of IFRS 9, the entity should then consider 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’.

Appendix A of IFRS 17 defines insurance ‘insurance risk’ as ‘risk, other than financial risk, transferred from the holder of a contract to the issuer’, where ‘financial risk’ is ‘the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, currency exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract’.

Determining whether insurance risk is ‘significant’ within the definition of an insurance contract requires judgement and is a difficult area to assess in practice. It will depend on the specific facts and circumstances of the arrangement, the parties involved and the terms and conditions of the guarantee contract.

Paragraphs B2 - B30 of Appendix B to IFRS 17 provide further guidance on the definition of an ‘insurance contract’, with paragraphs B17 - B23 discussing the meaning of ‘significant insurance risk’. Insurance risk is explained as being significant if, and only if, an insured event could cause the issuer to pay additional amounts that are significant in any single scenario, excluding scenarios that have no commercial substance (i.e. no discernible effect on the economics of the transaction).

Paragraph B26 provides examples of insurance contracts (assuming that the transfer of insurance risk is significant) – these include performance bonds, i.e. contracts that compensate the holder if another party fails to perform a contractual obligation (for example, an obligation to construct a building). Conversely, paragraph B27 provides examples of items that are not insurance contracts – these include contracts that require a payment if a specified uncertain future event occurs, but do not require, as a contractual precondition for payment, the event to adversely affect the policyholder.

The Committee also added that entities should consider the scoping requirements in paragraphs 3 to 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, for example this covers interlia product warranties, residual value guarantees, and the provision of services for a fixed fee.

Other IFRS Accounting Standards that might apply

If a guarantee is neither a financial guarantee contract nor an insurance contract, other IFRS Standards should then be considered to determine how to account for it.

This should include:

• Assessing if the guarantee might be within the scope of IFRS 9 because it is a loan commitment, a derivative, or otherwise meets the definition of a financial liability as defined in IAS 32 Financial Instruments: Presentation.
• Assessing if the guarantee might fall within the scope of IFRS 15 Revenue form Contracts with Customers because the counterparty to the guarantee is a customer, for example, IFRS 17 provides the example that a warranty provided in connection with the sale of goods to a customer would fall within IFRS 15.
• Assessing if IAS 37 Provisions, Contingent Liabilities and Contingent Assets may apply, which is where the guarantee gives rise to a provision, contingent liability or contingent asset that is not within the scope of any other IFRS Standard.

When is this effective?

An agenda decision is effective immediately from the date when it is published by the IASB. This agenda decision was published in April 2025.

Who is this applicable to?

The fact pattern set out in an agenda decision is often specific to the stakeholder submitting the question for consideration and therefore may not apply to other businesses. However, the Committee’s conclusion and the explanatory material provided in an agenda decision is sometimes applicable to other IFRS reporters with related circumstances, which in this case are entities issuing any form of guarantee, such as a financial guarantee, a performance guarantee or any other guarantee over another entity’s obligations.