Question

You have issued a financial guarantee for Rs 20 lakhs to a beneficiary on behalf of your customer. How will you show this transaction in your financial statements? Select one:

a. As an asset

b. As a liability

c. As a contingent liability

d. As a financing cost

e. As a contingent asset

Answer 1

c.As a contingent liability

A financial guarantee is a contingent liability. This means it is a liability which may or may not arise and is dependent/contingent upon the happening of a certain event.

a is incorrect since asset is something which adds value and is used to earn income.

b is incorrect since it is not a sure liability. If the customer makes the payment the liability will not arise.

d is incorrect since this is not a cost or expense for the company.

e is incorrect since if the customer does not honour the commitment, this will become a liability for the company.