Creditor often requires providing a guarantee of fulfilment of borrowers’ obligations to be sure that he/she will perform them. Often suretyship is such a guarantee. This transaction is executed by entering into a suretyship agreement. How suretyship should be reflected in accounting of a surety, a debtor and a creditor – in the following.
Accounting of surety
After the conclusion of the suretyship agreement for the amount of the suretyship specified in the contract, the surety should reserve it by debit off balance sheet account 05 “Guarantees and security provided”. It should be recalled that this account is intended for generalization of information about the presence and movement of guarantees and provisions issued by the company, execution of both their own obligations and obligations on payments of other companies, in particular under suretyship agreements.
In case of repayment by the surety of the debt to the creditor due to failure of obligations by the debtor, the surety withholds the amount from the off balance sheet account 05 (reflected under the loan).
The amount of suretyship should be written off balance sheet and in case of its termination on other grounds. For example, in the case of termination of the surety, that is, when the debtor individually paid the debt without the participation of the surety.
At the time of performance of obligations under the suretyship agreement, the surety not only write off the suretyship amount from the off balance sheet account 05, but also reflects the formation of accounts receivable, formed during the repayment of the amount of debt on the debit of subaccount 377. Under the loan of this subaccount, the suretyship will show the write-off of arrears in connection with compensation by the debtor of the amount paid by the surety.
Consequently, in case of transferring to the creditor of funds under the suretyship agreement (repayment of the debtor’s debt), the surety does not have any costs. Accordingly, if he/she receives a refund, he/she does not have income.
At the same time, one should not forget about the suretyship service itself. Thus, if the surety receives remuneration for the provision of such a service, such a transaction must be registered as an ordinary service. In the amount of such a service, he/she must recognize other income from financial transactions, that is, to reflect it on a subaccount loan 733. All costs incurred in providing such a suretyship (for example, a bank fee for the transfer of the amount specified in the surety agreement) should be shown on the subaccount 952 “Other financial expenses”.
If a free suretyship is provided, then the surety does not have income. At the same time, the costs associated with such a transaction, the surety has (the amount of bank commission for the transfer of amount stipulated in the suretyship agreement). Consequently, in his/her account there will be such expenses in the account 92 (para. 18 Accounting Standards 16).
Accounting of debtor
Repayment of surety obligations to the creditor does not increase debtor’s assets and does not reduce the liability. There is no income in the debtor’s accounts for this transaction (para.5 of Accounting Standards 15).
At the same time, the debtor should reflect in the accounting the replacement of the creditor (Part 2 of Art. 556 of TCU). In order to do this, it is necessary to reduce the debt on a credit or loan to the original creditor (Dr 601, 611 or 685) and simultaneously increase the debt to the surety (Kr 685).
The accruing of obligations to pay to the surety for the service provided (if the contract stipulates that the service is on a paying basis) is reflected on the debit of the subaccount 952 “Other financial expenses” in correspondence with the subaccount 685 “Payments with other creditors”.
If the service is free of charge, then the increase/decrease of assets, as well as the decrease/increase of obligations in case of receiving a free surety service does not occur. Criteria for the recognition of income/expenses from para 5 of Accounting Standards 15 and para.5 of Accounting Standards 16 are not met. Usually such a transaction is not reflected in the accounting.
Accounting of creditor
In the case of entering into a surety agreement, the creditor must reflect on the off balance sheet account 06 “Guarantees and provision received” received suretyship. It is accounted on this account until the debtor fails to fulfil his/her obligations or the surety does not repay the debtor’s debt due to his/her failure to repay the debt.
Provisions are accounted for at the cost specified in the suretyship agreement.
If the obligation to the creditor is not paid by the debtor, but the surety, then the creditor first transfers the amount of debt from one creditor to another (subaccount debit 377 and subaccount credit of 377 (settlements with the surety), and then, at the time of debt repayment, the surety writes off the amount of arrears from the subaccount 377.
The creditor should reflect enrolment of the guarantor’s debt in the accounting records at the time of execution of the obligation by the surety.
