A financial guarantee is a specific type of a financial liability defined in IFRS 9.
It arises when an entity backs up a loan or debt taken by another entity and it often happens among the companies within one group.
And, as it is intra-group, there is often no premium paid by the debtor to the party issuing the guarantee.
I received a following question related to this topic:
“Hi Silvia, we have a subsidiary in a foreign country and the subsidiary needed to take a loan.
The bank provided a loan, but we, the parent company, had to guarantee that we would pay the debt in case if our subsidiary fails to pay.
Our auditors say that we have a financial guarantee under IFRS 9 and we should account for it. But how?
Also, we issued a general guarantee to support our subsidiary in case of the negative equity – should we also account for this guarantee?”