Today we are going to discuss about – Ind AS 109: Treatment of dues recoverable on account of invocation of bank guarantee in the balance sheet
Query:
Company X Ltd. provides financial assistance for procurement of raw material to Y Ltd. Wherein Y Ltd. defaulted in repayment of dues to X Ltd. Subsequently BG was invoked by X Ltd. However, the respective bank has not honored/paid the invoked amount of BG to X ltd. as on 31st March of the financial year.
When Accounting Standards (ASs) notified under the Companies (Accounting Standards) Rules, 2006 were applicable to the Company.
Whether an amount recoverable from bank on account of invocation of bank guarantee be classified as “Short Term Loans and Advances” under the head “Loans and Advances – Unsecured Considered Good (Backed by BG)” or it is to be classified as “Short Term Loans and Advances” under the head “Advance Recoverable in Cash or in Kind or for Value to be Received – Unsecured Considered Good – from banks (Backed by BG)”
When Indian Accounting Standards are applicable
Whether an amount recoverable from bank on account of invocation of bank guarantee be classified “Loans and Advances” under the head “Covered by Bank/ Government Guarantees” or it is to be classified as “Other Financial Assets” under the head “Receivables from Banks-Others”
Answer: When Accounting Standards (ASs) notified under the Companies (Accounting Standards) Rules, 2006 were applicable to the Company.
An asset should be derecognized from the financial statements when it ceases to meet the definition of ‘asset’ as per paragraph 49(a) of the Framework for the preparation and presentation of Financial Statements i.e., when the asset is no longer a ‘resource controlled’ by the enterprise from which future economic benefits are expected to flow to the enterprise.
X Ltd. should evaluate based on its own facts and circumstances and considering the relevant provisions/terms of the Bank Guarantee Bond and any other Agreement between X Ltd. and Y Ltd. or the bank, as to whether on invocation of the BG, it still has a control (through legal right or otherwise as explained above) over Y Ltd. If after such evaluation, it is concluded that X Ltd. does not have such control, then it should derecognize the ‘Receivable from debtors’ from its financial statements and an asset in the form of ‘Receivable from bank due to invocation of bank guarantee’ should be created, provided it meets the definition of ‘asset’.
The receivables from bank on invocation of BGs should be classified under ‘Other current assets’ along with a disclosure of the amount, if any, considered doubtful.
When Indian Accounting Standards are applicable
X Ltd. should evaluate considering the requirements of Ind AS 109 that , whether on invocation of the BG, the contractual rights to the cash flows from the debtor(Y Ltd.) are transferred to the bank and whether X Ltd. has transferred substantially all the risks and rewards of ownership of the financial asset i.e. receivable from Y Ltd., based on the facts and circumstances and considering the relevant provisions/terms of the Bank Guarantee Bond and any other Agreement between X Ltd. and Y Ltd. or the bank. If after such evaluation, it is concluded that the financial asset, viz., receivable from Y Ltd. should be derecognized, then X Ltd. should derecognize the ‘receivable from debtor units’ from its financial statements. Further, at the same time, X Ltd. should recognize a new financial asset in the form of receivable/recoverable from the bank, considering the requirements of Ind AS 109.
The receivables from bank should be presented under the head “Other financial assets’ with an appropriate nomenclature and disclosure.
References
– EAC opinion Query 4, Volume 40
– Opinion finalized on 23rd May 2020
– Ind AS 109
Relevant Extract from Framework for the Preparation and Presentation of Financial Statements
49. The elements directly related to the measurement of financial position are assets, liabilities and equity. These are defined as follows:
(a) An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Relevant Extract from Ind AS 109
3.2.6 When an entity transfers a financial asset (see paragraph 3.2.4), it shall evaluate the extent to which it retains the risks and rewards of ownership of the financial asset. In this case:
(a) if the entity transfers substantially all the risks and rewards of ownership of the financial asset, the entity shall derecognize the financial asset and recognize separately as assets or liabilities any rights and obligations created or retained in the transfer
(c) if the entity neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the entity shall determine whether it has retained control of the financial asset.