Ind-As 109 “Financial Instruments” section 5.1 states that, All financial Instruments should be valued at its fair value on initial recognition (which normally be its transaction price)” and since … In consolidated financial statements of H group, there would be no impact as it would be eliminated as an inter company transaction. Fair valuation under Ind AS is generally dealt with by Ind AS 113 Fair Value Measurement. Ind AS 106 Exploration for and Evaluation of Mineral Resources: 8. Often, in India, parent companies do not charge guarantee commissions from subsidiaries. They are most likely a derivative required to be fair valued through P&L. The fair value of the financial guarantee is 100. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. Over next few months, as more companies apply Ind AS, practices would emerge. Accordingly, cash shortfalls are the expected payments to reimburse the holder for a credit loss that it incurs less any amounts that the entity expects to receive from the holder, the debtor or any other party. For Company A the commission expense of financial guarantee will be considered as transaction cost for obtaining the loan, being an incremental cost incurred by the entity for the loan without which the loan would have not been disbursed by bank C. Hence same will be reduced from the initial recognition of loan at fair value. One may argue that there is no specified holder of the instrument. Ind AS 109 does not provide any guidance for financial guarantee accounting in the books of beneficiary. The benefit to receiver of the guarantee is typically in the form of interest cost savings owing to the presence of an explicit parent company’s guarantee underlying the subsidiary’s loan. The holding   company H will recognize financial asset receivable and financial guarantee obligation both at 100 on day 1.Over the term of the subsidiary’s loan, on one hand, H would recognize revenue through P&L that will unwind the guarantee obligation, on the other hand, the commission realisations would reduce the financial asset receivable. Nevertheless, if the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting that is applicable to insurance contracts, the issuer may elect to apply either Ind AS 109 or Ind AS104 to such financial guarantee contracts.If a financial guarantee contract was issued in connection with the sale of goods, the issuer applies Ind AS 115 in determining when it recognises the revenue from the guarantee and from the sale of goods. If the consideration is not receivable upfront but on different time intervals than entity has to discount the cashflow receivables to determine the NPV which will be the fair value on initial recognition and financing component (i.e. In this case, if A Ltd. follows Ind AS, estimated cash discount is 500. In other words, if the contract does not, as a precondition for payment, require that the holder (e.g. The fair value of the financial guarantee is 100. As per Ind AS 109, the expected credit loss on the financial guarantee contract will be determined using ‘General approach’, as per the approach the financial guarantee contract must be classified into stage 1 on initial recognition. Lessee accounting under Ind AS 116 (1/3) Particulars Accounting treatment Right-to-use asset Initial Recognition and treatment – On the date of commencement of lease, a lessee shall measure the right … Ind AS 101, First-time Adoption of Indian Accounting Standards 10. Therefore the parent’s guarantees are integral to the subsidiary’s loan agreement. A significant area of impact for several companies that have transitioned to Indian Accounting Standards (Ind AS) is the classification of financial instruments issued by the company, as a financial liability or … Therefore, fair value based on independent pricing of commission should ideally factor in both these factors. Subsequently, if S is expected to default on its payments, H would impair the receivable on expected credit loss basis. However, Company A in an arrangement with external party (being non-related party) would have recognised this as an expense and hence, to eliminate gaps at consolidation as well as treat it at arm’s length, mirror accounting has been adopted in the books of A. Holding Company B has provided guarantee to bank C to pay in case of default / non-payment by Company A. Amount based on ECL method – INR 10,920,000, b. Ind AS requires an issuer of financial instruments to classify them as equity or a financial liability based on the substance of their contractual terms. -Credit/ default risk – this lies at the heart of determining the arm’s length guarantee commission. of Ind AS104 if the derivative is not itself a contract within the scope of Ind AS104. Further there is currently a lack of detailed valuation guidance and shortage of valuation expertise. Ind AS addresses the treatment of financial guarantee contracts by the issuer. It is not clear whether letters of support would meet the definition of financial guarantee contract. Even if a parent charges guarantee commissions to the subsidiary, the commission charged may not necessarily reflect fair value since the two are not independent market participants. It must be to reimburse the holder for a loss only and holder should not be compensated for more than the actual loss incurred. 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