The International Accounting Standards Board (IASB) has issued draft guidance for consultation for the IFRS for SMEs standard about the treatment of financial guarantees issued by a parent company in their financial statements
The draft Q&As are the first guidance produced by the IASB’s SME Implementation Group since a comprehensive review of IFRS for SMEs in May 2015.
The issue at hand is whether ‘a parent entity prepares separate financial statements applying the IFRS for SMEs Standard. The parent entity guarantees repayment of a loan from a bank to one of its subsidiaries. How does the parent entity account for the financial guarantee issued to the bank in its separate financial statements?’
The implementation group has deemed that the accounting treatment should follow the guidance provided in Section 12 Other Financial Instrument Issues of IFRS for SMEs, unless applying the full IFRS standard IAS 39 Financial Instruments: Recognition and Measurement.
A financial instrument is defined by IFRS for SMES as ‘a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity’. This guarantee from the parent company is a ‘contractual right’ of the bank to receive cash from the parent, and an obligation on the parent to pay if the subsidiary defaults. The contract is, therefore, a financial asset of the bank and liability for the parent.
In this instance, the guarantee is contingent on a future unknown event, and is such not a ‘basic financial instrument’ - as such, the group suggests it fits better into section 12 of IFRS for SMEs.
IFRS for SMEs is a small standard of approximately 250 pages, tailored for small and medium-sized companies. The new UK GAAP, including FRS 102, is based on this standard.
The consultation closes for comment on 1 September 2017.
Report by Kevin Reed