ASC Adopts Amendments to Requirements for Financial Guarantee Contracts
The Accounting Standards Council (ASC) approved the adoption of the amended requirements for financial guarantee contracts, issued by the International Accounting Standards (IASB), in the form of limited amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 4, Insurance Contracts – Financial Guarantee Contracts, as part of PAS 39 and PFRS 4, respectively. The ASC issued an Invitation to Comment on the proposed amendments in August 2004.
The amendments are intended to ensure that issuers of financial guarantee contracts include the resulting liabilities in their balance sheet. Some highlights:
- A financial guarantee contract is a ‘contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument’. These contracts could have various legal forms, including a guarantee, some types of letter of credit, or a credit insurance contract.
- The amendments to IAS 39 require the issuer of a financial guarantee contract to measure the contract initially at fair value and subsequently at the higher of (a) the amount determined in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets and (b) the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with IAS 18, Revenue.
- If an issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply to such contracts either IFRS 4 or the IAS 39 accounting described above.
The amendments are effective for annual periods beginning on or after January 1, 2006. Earlier application is encouraged.
The pronouncement on the amendments has been forwarded to the Board of Accountancy and Professional Regulation Commission for approval.