The amendment to AASB 139 Financial Instruments: Recognition and Measurement, which brings a number of financial guarantee contracts within the ambit of this standard, has arrived in full force and caught many companies unaware.

Financial guarantee contracts may have various legal forms, such as loan performance guarantees, even where it relates to a subsidiary’s borrowing, some types of letter of credit, or a credit default contract, to name but a few. It is imperative that all potential guarantees are identified, and where applicable, recorded at fair value.

This Accounting alert provides a high level overview of the requirements of the amendment and highlights common problematic areas. Care should be taken not to underestimate the complexity and the time that may be required in identifying and determining the fair value of financial guarantees impacted by this amendment.

Financial guarantee contracts can take various forms and are often complex to value. In this Accounting Alert, we explore the following:

• what is a financial guarantee?
• have you identified all the financial guarantee contracts?
• what are the accounting implications of a financial guarantee contract? 
• what is the ‘fair value at inception’, and what are the common issues that surround determining that fair value? 
• what about deeds of cross guarantee?

To read more, please download the PDF document in the attachments section below.