What's the issue?
Under a financial guarantee contract, the issuer is required to reimburse a loss incurred by the holder. A common example of a financial guarantee contract is a parent company providing a guarantee over its subsidiary's borrowings.
Because these contracts transfer significant insurance risk, they typically meet the definition of an insurance contract.
With the replacement of IFRS 4 Insurance Contracts by IFRS 17 Insurance Contracts, the accounting for these contracts may change significantly. Companies now need to apply either IFRS 17 or IFRS 9 Financial Instruments to these contracts.
What's the impact?
The impact on the financial statements will differ depending on whether a company applies IFRS 17 or IFRS 9.
The key impacts include:
- the measurement of the contract liability; and
- the timing of profit recognition.
