Decoding Mortgage Guarantee Accounting
Doing business in the complex area of IndAS compliance is a real headache for mortgage guarantors. Take Safe Home Mortgage Guarantors Limited, for example; they will be facing the challenge of accurately accounting for their guarantee commitments under the new standards. Given that aim, it will outline here the necessary appreciation, measurement, and disclosure of provisions, including their accounting treatment. How it will be done is here described to assist mortgage guarantors such as Safe Home who can navigate with accurate reporting and compliance to finance
Function of Mortgage Guarantees
Mortgage guarantees, especially First Loss Default Guarantees (FL DG), protect the lender from loss at the very first stage of default. FLDG also protects a first-loss default, thus preventing nonperforming asset classification. Whenever a borrower defaults, it triggers the FLDG, compensating the lender after a specified loss threshold, thus ensuring the financial viability of lenders and simultaneously reducing risk exposure
Important Accounting Standards: Ind AS 109 and Ind AS 115
AP 109 financial instruments provide standards for the classification, measurement, and impairment of financial instruments related to mortgage guarantees. It ensures accurate risk management accounting. AS 115 explains the revenue recognition from the contract with the customer as necessary for premium fees and guarantee fees since it entails revenue recognition over the term of the guarantee as the services are rendered to the customers, thus providing fair financial reporting.
Opinion of Expert Advisory Committee on Mortgage Guarantees
Safe Home Mortgage Guarantors Limited requested EAC’s views on whether mortgage guarantees are considered financial guarantees for the purposes of Ind AS 109 and whether upfront fees need to be accounted for under the Ind AS 115 revenue recognition provisions. The EAC confirmed that mortgage guarantees are financial guarantees. From the perspective of upfront charges, the committee decided to amortize them over the life of the guarantee and to accrue revenue accordingly in Ind AS 115.
Addressing the Accounting Challenges
There is a difficulty in classifying mortgage guarantees as financial guarantees according to Ind AS 109 due to an inscrutable risk exposure. Matching the revenue recognition period with the periods for guarantee coverage can be particularly problematic for revenue recognition of upfront fees. That mandates proper amortization and insistence on Ind AS 115 compliance so that proper financial reporting is produced that accounts for the service provided to date.
Implications for Financial Statements and Compliance
Following the IndAS transition, the company must make the necessary adjustments to its financial statements so that mortgage counterparties under Ind AS 109 are fairly measured and revenue under Ind AS 115 is properly accounted for. The listed standard is strictly adhered to to truly disclose, properly classify the financial instruments, and properly identify fees, which in turn guarantees a transparent disclosure of the financial information to the stakeholders and keeps the company compliant with the regulation.
The Road Ahead for Mortgage Guarantee Accounting
In conclusion, mortgage guarantee accounting under IndAS requires proper classification under IndAS 109 and revenue recognition properly under IndAS 115. For this reason, both are crucial for financial reporting to be effective. Professional consulting is always required in this process. As a regulator/management/organization of the corporation, it is obligatory to follow the Ind AS practice concerning the company’s financial management to keep it transparent and reliable in the future.
