Why are financial guarantee contracts so popular yet so complex?

As interest rates continue to increase and the global economy steadily declines, companies must find smarter ways to structure their debt, both from third-party providers and group borrowings. Bianca Blanckenberg,
Senior Manager for Financial Services at BDO South Africa shares some insight into the complexities of the measurement of risk and costs associated with issuing financial guarantee contracts (FGCs) and the financial reporting requirements.

With the introduction of IFRS 9, FGCs are now required to be measured and presented as disclosures in the financial statements of guarantors. A financial guarantee contract (FGC) generally leads to preferential terms and conditions for the guaranteed entity. The stronger financial power of the guarantor ultimately leads to a credit rating enhancement of the guaranteed entity that may result in various benefits, such as a lower interest rate or access to larger facilities. This makes them an attractive option to explore.