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Debt Guarantees Impact on Economic Behavior & Accounting Treatment

Understand debt guarantees in national accounts, impact on economic behavior, and AEG decisions. Differentiate between financial derivatives, standardised guarantees, and one-off guarantees. Explore the accounting treatment for each case. Analyze implications for financial markets and public sector. Learn about the convergence with international accounting standards. Get insights on guarantees as financial instruments and liabilities. Enhance your knowledge on debt guarantee activation and recording procedures. Attend the Guarantees Meeting in Geneva!

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Debt Guarantees Impact on Economic Behavior & Accounting Treatment

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  1. Guarantees Nuno Silva Geneva, 25-28 April 2006 Joint UNECE/Eurostat/OECD/ Meeting on National Accounts and update of SNA

  2. What are debt guarantee? Debt guarantees are arrangements in which a guarantor agrees to pay a creditor if a debtor defaults. For general government, giving a guarantee is a way to support economic activities without a need for an immediate cash outlay. Guarantees have a significant impact on the behaviour of economic agents by modifying the lending and borrowing conditions on financial markets.

  3. The AEG decisions • In the 1993 SNA only guarantees that are classified as financial derivatives are recorded • However, important contingencies should be provided assupplementary information • The AEG argued that this treatment should be modified for three reasons: • (i) the supplementary data is currently not reported • (ii) the need to delineate across economic events that lead to guarantees • (iii) the convergence with international accounting standards that quantify the underlying liability, notably in the public sector

  4. Case 1: Financial derivatives • Those that are actively traded on financial markets, such as credit default swaps • The derivative would be based on the risk of default of a reference instrument and so not actually linked to an individual loan or bond

  5. Case I: The accounting treatment • The purchaser pays a fee – this is recorded as a transaction in financial derivatives • Changes to the value of the derivative are recorded as revaluations • The reference instrument defaults – this is also recorded as a transaction in financial derivatives

  6. Case 2: Standardised guarantees • Similar types of credit risk for a large number of cases • It is not possible to estimate precisely the risk of default of each individual loan but • It is possible to estimate how many out of a large number of similar loans will default • It is possible for the guarantor to determine suitable fees

  7. Case 2: The accounting treatment (1) • These guarantees are to be recorded like insurance • When fees cover costs… • If a publicly controlled market guarantor sells guarantees for premiums that do not fully cover the costs… • If a government unit provides the guarantee to a creditor without a fee…

  8. Case 2: The accounting treatment (2) • The value of the output and consumption… • The initial value of the financial asset and liability… • The expected cost of calls should be spread over time • Claims would be recorded like insurance claims

  9. Case 2: The accounting treatment (3) • Property income is imputed… and deemed to be reinvested… • Other changes in the financial asset and liability are recorded as other changes in the volume of assets • The asset is always recorded in the balance sheet of the entity that holds the right to claim and receive funds • Rerouting transactions are needed when…

  10. Case 3: One-off guarantees • It is not possible to accurately calculate the degree of risk associated with the debt • In most cases they are considered a contingency and is not recorded as a financial asset or liability • As an exception, one-off guarantees might be treated as if these guarantees were called at inception

  11. Case 3: The accounting treatment • The activation of a one-off guarantee is treated in the same way as a debt assumption • In most instances, the guarantor is deemed to make a capital transfer to the original debtor • The amount of debt assumed should be recorded at the time the guarantee is actually activated and the debt assumed

  12. Questions?

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