Guarantee over a Derivative Contract (IFRS 9)

Date recorded:


The IFRS IC received a submission about how to assess whether an issuer accounts for a guarantee written over a derivative contract as a financial guarantee contract or a derivative. In the fact pattern described, Entity C provides a guarantee over a derivative contract between Entity A and Entity B, which promises to reimburse Entity A, in full or in part, the actual loss suffered in the event of a default by Entity B. Reimbursement under the guarantee will be provided only if the derivative contract is a financial asset for Entity A and Entity B has failed to make payment of the close-out amount when due in full or in part. The close-out amount is fixed only in the event of a default and is based on the fair value of derivative contract. The submitter outlines various views: View A—the guarantee meets the definition of a financial guarantee contract; View B1—The guarantee meets the definition of a derivative; View B2—The guarantee meets neither the definition of financial guarantee nor a derivative.

Staff analysis

The staff sent information request to members of the International Forum of Accounting Standard-Setters (IFASS), securities regulators and large accounting firms. All respondents said that such an arrangement is not common or widespread and there are no material effects on financial statements when the matter does arise. Some standard-setters and accounting firms shared how they would theoretically apply the requirements in IFRS 9 to such a guarantee and some of these respondents noted that there could be potential diversity in practice.

The staff noted that similar questions about whether a guarantee contract meets the definition of a financial guarantee contract as defined in IFRS 9, could arise in other circumstances. The staff was of the view that the focus of this question is whether the guarantee is written over a ‘debt instrument’ as referenced in the definition of a financial guarantee contract. Therefore, any potential standard-setting project to eliminate diversity in practice would extend beyond the fact pattern described in the request and could result in significant unintended consequences when applying the requirements for financial guarantee contracts more generally. Therefore, the staff concluded that the matter described in the request is, in isolation, too narrow for the IASB or the IFRS IC to address in a cost-effective manner.

Staff recommendation

The staff recommended not to add a standard-setting project to the work plan but to publish a tentative agenda decision that explains the reasons for not adding a standard-setting project.

IFRS IC discussion

Some IFRS IC members agreed that the accounting treatment under different approaches would be different in terms of timing and amount recognised but the difference would be immaterial. However, a few IFRS IC members commented that the agenda decision did not give an analysis or explicit evidence to conclude the impact is immaterial. Instead of saying such conclusion is based on evidence gathered, negative assurance is suggested. The staff agreed with this and suggested removing the phrase "based on evidence gathered" in the tentative agenda decision.

IFRS IC decision

All IFRS IC members agreed with the conclusion of not adding this to the standard-setting project plan and agreed with the wording of the tentative agenda decision including the suggested amendments.

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