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Home » Blog » Accounting treatment and auditor’s obligation with respect to financial guarantees

Accounting treatment and auditor’s obligation with respect to financial guarantees

  • Account & Audit|Blog|News|
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  • By Taxmann
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  • Last Updated on 15 January, 2022

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Accounting treatment and auditor’s obligation; financial guarantees; Ind AS 107; Ind AS 32; Ind AS 109

The company has given a financial guarantee and is required to follow Ind AS 109 (Financial Instruments), Ind AS 107 (Financial Instruments: Disclosures), and Ind AS 32 (Financial Instruments: Presentation) in respect of the financial guarantee, since as per clarification issued “Where there is a contractual obligation of the entity by issuing comfort letter/letter of financial support to make specified payment in case the other party does not make the payment then such comfort letter/letter of financial support would be considered as a financial guarantee and will be accounted for in accordance with Ind AS 109”.

Practical problem with respect to financial guarantees which may occur while conducting the audit

Suppose X Ltd. has issued a letter of comfort in respect of a loan availed by its subsidiary but fails to treat such letter of comfort as a financial liability. Further, the management of the company provides auditors reasons that letter of comfort does not meet the recognition criteria and thus there was no obligation to pay in case defaults so not applied Ind AS 109 and auditor satisfied with reason provided by management and no verification was made by the auditors. What are the responsibilities that an auditor lacks while performing an audit of a financial guarantee and what should be the procedure he should follow?

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied
View all posts by Taxmann

Author TaxmannPosted on January 15, 2022Categories Account & Audit, Blog, News

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