AFM391 Lecture Notes - Lecture 9: Credit Risk, Maximum Exposure
28 Jun 2018
School
Department
Course
Professor
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COMMITMENTS AND GUARANTEES
E.
Commitments1.
Many legally binding contracts that company enter into are mutually unexecuted contracts in that
neither party has yet completed any part of the agreement
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User of financial statements need to be made aware
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Need to disclose in the notes
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We do not report the assets and liabilities that will eventually arise from mutually unexecuted
contracts until they meet the IFRS criteria, but companies can't ignore them for accounting
purposes
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An
onerous contract
is one in which the unavoidable costs of fulfilling the contract exceed
the benefits expected to be received. See how it uses expected rather than the current
market value
○
IAS require companies to recognize the cost of onerous contracts on the balance sheet.
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Exhibit 11
-
22 shows how a drop in the market price may or may not lead to an onerous contract
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Guarantees
2.
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
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Company A must also disclose details of the guarantee which is the maximum exposure to
credit risk from granting financial guarantees, which is the maximum amount the entity
could have to pay if the guarantee is called on, which may be significantly greater than the
amount recognized as a liability
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The guarantor (company A) must initially recognize a liability for the fair value of the guarantee of
company B's indebtedness
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SUBSTANTIVE DIFFERENCES BETWEEN RELEVANT IFRS AND ASPEG.
AFM 391 Page 17
Document Summary
Many legally binding contracts that company enter into are mutually unexecuted contracts in that neither party has yet completed any part of the agreement. We do not report the assets and liabilities that will eventually arise from mutually unexecuted contracts until they meet the ifrs criteria, but companies can"t ignore them for accounting purposes. User of financial statements need to be made aware. Ias require companies to recognize the cost of onerous contracts on the balance sheet. An onerous contract is one in which the unavoidable costs of fulfilling the contract exceed the benefits expected to be received. See how it uses expected rather than the current market value. Exhibit 11-22 shows how a drop in the market price may or may not lead to an onerous contract. The guarantor (company a) must initially recognize a liability for the fair value of the guarantee of company b"s indebtedness.
