Section PS 3310 - Loan Guarantees

Updated: March 2014

Loan guarantee

• A loan guarantee is a promise to pay all or a part of the principal and / or interest on a debt obligation in the event of default by the borrower.
• Government loan guarantees must be accounted for and reported as contingent liabilities in the government’s financial statements.

Providing for losses

• When it is determined that a loss is likely, a provision for losses on loan guarantees must be established and must be accounted for as a liability in the Statement of Financial Position and as an expense in the Statement of Operations.
• Refer to the guidance in paragraph PS 3390.09 for factors that may indicate a loss is likely.

Estimating the provision for losses

• The following must be taken into account in determining the provision for losses on loan guarantees:
  • The principal amount outstanding;
  • Accrued and unpaid interest, if it is guaranteed; and
  • Amounts recoverable from the borrower and from the sale of assets pledged as security.
• The provision for losses on loan guarantees must be determined using the best estimates available in light of past events, current conditions, and all circumstances known at the date of preparation of the financial statements.
• Present value techniques may be used to measure the provision. The average borrowing rate of the government may be an appropriate discount rate.

Removal of the provision of losses from the financial statements

• When the guaranteed loan has been discharged or the term of the guaranteed loan has expired, the provision for loss on the loan guaranteed must be removed from the government’s Statement of Financial Position.
• In the case where the government has made payments under the terms of a guarantee and has recourse to recover amounts paid from the borrower, these amounts must be accounted for in accordance with Section PS 3050, Loans Receivable.

Guaranteed loans to be repaid from future government assistance

• In the period when a direct relationship can be established between the repayment of the loan and the government’s funding to the borrower, the amount of the guaranteed loan that is expected to be repaid from future government assistance must be accounted for as a liability in the Statement of Financial Position and as an expense in the Statement of Operations.
  • The portion of the assistance that is used to make principal payments on a guaranteed loan accounted for as described above must be charged against the liability.
  • The portion of the assistance that is used to make principal payments on a guaranteed loan accounted for as described above must be charged against the liability.