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‘A company has guaranteed the overdraft of another company. The likelihood of a liability arising under the guarantee is assessed as possible.’ What does this mean?
Thanks!
If you have an overdraft (i.e. you borrow money from the bank) then obviously there is a risk to the bank that you might not repay.
If I guarantee the overdraft, then it means that I promise to the bank that if you do not pay then I will pay instead. (There is less risk to the bank and therefore they might be more likely to lend you the money).
Because I have guaranteed the overdraft it therefore means that there is a chance that I might have to pay the money. Therefore a contingent liability. From the free lecture on IAS 37, you will know what the accounting standard says that I should do if it is classed as “possible”.
But then what are the benefits to the company who has guaranteed the overdraft of another company? What is this type of service called?
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