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What is a Financial Performance Guarantee?

 

1. DEFINITION

a "Financial Guarantee" Contract is defined as:

"… 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."

Financial Guarantee Contracts may take various legal forms, such as a guarantee, some types of letters of credit, a credit default contract or an insurance contract. Their accounting treatment does not depend on their legal form.

2. EXCLUSIONS

Financial Guarantee Contracts exclude:

· Performance Guarantees, (where the Guarantor is not guaranteeing the payment of a debt);
· Letters of Support between entities under common control, as the parent is usually not required to compensate any third party when the controlled entity defaults, and
· Statutory Guarantees, as they are granted under Statute rather than Contract. 

3. FINANCIAL GUARANTEES GIVEN UNDER THE PUBLIC 
AUTHORITIES (FINANCIAL ARRANGEMENTS) ACT 1987

Guarantees given under the Public Authorities (Financial Arrangements) Act 1987 (PAFA) fall into two categories depending under which section of the Act they are given. Most of these guarantees are Statutory Guarantees under Section 22A pf the Act (whereby the Act grants the Guarantee), which are excluded from the scope of AASB 139 (AASB 132, para AG 12

However, Guarantees given under Section 22B and Section 22AA, where they satisfy the definition of a "Financial Guarantee Contract," are regarded as Discretionary Guarantees (rather than Statutory Guarantees) and subject to AASB 139. As discussed, above, however, Performance Guarantees granted under these sections do not satisfy the definition of a "Financial Guarantee Contract" and are therefore excluded from the scope of AASB 139.


4. OTHER CROWN FINANCIAL GUARANTEES

The definition of a Financial Guarantee Contract within AASB 139 seeks to capture all Contracts "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."

Although the term, "Debt Instrument" is used extensively, it is not defined. The term will typically be considered to include trade debts, overdrafts and other borrowings like loans and certain debt securities. Therefore, this definition encompasses Contracts other than just loan or credit facilities that generally require approval under the PAFA Act.

 

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