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Under Ind AS, a financial guarantee contract is:
AAlways treated as a contingent liability under Ind AS 37 because of its uncertain outcome
BWithin the scope of Ind AS 109 and therefore excluded from contingent-liability disclosure under Ind AS 37
CRecognised only when the guarantor is actually called upon by the guaranteed party
DOutside the scope of all financial-instrument standards as it is in substance an insurance contract
Answer & Solution
Correct answer: B. Within the scope of Ind AS 109 and therefore excluded from contingent-liability disclosure under Ind AS 37
Para 2 of Ind AS 37 excludes from its scope financial instruments within the scope of Ind AS 109. A financial guarantee creates a contractual obligation to pay cash on default of the underlying borrower, meeting the financial-liability definition. It is therefore governed by Ind AS 109, recognised at inception, and not disclosed merely as a contingent liability.
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