Could you, please, specify which standard to use while making off-balance guarantees provison (bank guarantees). Thank you
IAS 39 Accounting for Financial Instruments stipulates that banks’ originated loans should be carried at
amortised cost. IAS 39 does not introduce any special changes to the current accounting for
banks’ loan portfolio. Guarantees that require payment to be made when the debtor defaults on its
obligations are excluded from the scope of application of IAS 39. Such guarantees are reported
as off-balance sheet items, with the appropriate provisions for probable losses reflected in the
financial statements. However, guarantees that require payments to be made based on changes in
interest rates, exchange rates, commodity prices or some other reference or index are derivative
financial instruments that fall with the scope of IAS 39 and should be fair valued.
IAS 39 however explicitly outlines the broad principles for determining the degree of impairment
in assets, including originated loans. Under IAS 39 if there were a probability that a loan granted
by a bank would not be collected in total (principal and interest) according to the contractual
terms of the loan, then an impairment or bad debt loss has occurred. The amount of the loss is the
difference between the loan’s carrying amount and the present value of expected future cash flows
discounted at the original effective interest rate of the loan.