[Opinion] Corporate Financial Guarantees – A Technical Overview Under Ind AS 109

CA Siddharth Patel – [2025] 171 taxmann.com 453 (Article)

1. Introduction

In today’s dynamic financial landscape, corporate financial guarantees serve as a pivotal tool. Corporate financial guarantees are commitments made by companies to enhance the creditworthiness of borrowers, typically within a corporate group. These guarantees enable subsidiaries or related entities to obtain financing on more favourable terms.

Considering the evolving and rapidly changing financial landscape, where corporate financial guarantees have become increasingly prevalent, it is crucial to understand these instruments and their accounting treatment under Ind AS 109 to ensure accurate financial reporting and compliance.

2. Topics Covered in This Article:

This article provides a comprehensive analysis of corporate financial guarantees, including:

1. What Are Corporate Financial Guarantees?

2. The Rationale for Accounting for Corporate Financial Guarantees

3. Accounting Treatment Under Ind AS 109

3.1. Initial Recognition

3.2. Subsequent Measurement

4. Accounting in the books of

4.1. Guarantor’s and

4.2. the Beneficiary’s

5. GST Implications on Corporate Financial Guarantees

6. Conclusion

3. What Are Corporate Financial Guarantees?

A corporate financial guarantee is a contractual commitment whereby the guarantor promises to meet the payment obligations of a borrower if that borrower defaults. This commitment not only strengthens the borrowing entity’s credit profile but also plays a critical role in structured financing, particularly in group arrangements where a parent company may provide support to its subsidiary. In current market conditions, such guarantees are increasingly important for facilitating access to capital under more advantageous terms.

Example:

Consider a multinational manufacturing company, ABC Industries Ltd., which has a wholly owned subsidiary, XYZ Manufacturing Pvt. Ltd., operating in a developing market. XYZ Manufacturing seeks a loan of Rs.10 Crores from a bank to expand its production capacity. However, due to its relatively limited financial history and weaker credit standing, the bank is hesitant to approve the loan on favorable terms.

To strengthen the subsidiary’s credit profile, ABC Industries Ltd. provides a corporate financial guarantee to the lender, assuring that it will fulfill XYZ Manufacturing’s repayment obligations in case of default. As a result, the bank offers a lower interest rate and a longer repayment period, significantly improving the subsidiary’s financial flexibility.

This guarantee enables XYZ Manufacturing to secure the necessary funding for expansion while minimizing borrowing costs, showcasing how corporate financial guarantees enhance access to capital in structured financing.

4. The Rationale for Accounting for Guarantees

Even if no immediate cash outflow occurs, a corporate financial guarantee must be recorded because it represents a contingent liability—a potential obligation that depends on future events. The moment a company issues a financial guarantee, it assumes a legal and financial responsibility to step in if the borrower fails to meet its obligations.

From an accounting perspective, failing to recognize this potential risk would lead to an understatement of liabilities, which in turn could misrepresent the company’s financial health and risk exposure. This is particularly important for investors, lenders, and regulators who rely on financial statements for decision-making.

Additionally, accounting standards such as IFRS 9, ASC 460 (U.S. GAAP) and Ind as 109 require companies to recognize a financial guarantee liability at its fair value upon issuance and assess potential obligations periodically. If the borrower’s financial condition deteriorates, the likelihood of default increases, and the guarantor may need to adjust the liability in its financial statements accordingly.

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