WHAT IS PERFORMANCE GUARANTEE AND COUNTER GUARANTEE & HOW IT IS NOT CONTINGENT LIABILITY AS PER AS-29
Contingent Liability — Means liability which will arise on happening or non-happening of future events which are not in control of entity, they depend on external circumstances & parties.
For example — we know if we dont pay supplier on time we will have to pay penalty of say 5,00,000 now this is not contingent liability. It depends on our action which we can predict, if we think it wont be possible make provision for same, if we will be able to pay supplier dont make provision, dont show it as contingent liability.
So if something depends on our actions and behavior it is not contingent liability , if something is beyond our control depends on external; factors and people then it is contingent liability.
Now performance guarantee means, we promised to do some work, if we dont do it then we have to pay for it etc. Now it depends on our action and our work so name may be performance “guarantee” but it is contingent liability for us.
Now counter guarantee — means if bank etc has given guarantee on behalf of us , example company will pay insurance premium , import payment etc and now we give guarantee to bank , if you happen to pay for us , we will repay amount to you. So counter guarantee means we are covering guarantee given by bank on behalf of us.
if amount is already recorded as liability in books, any number of guarantees to pay that amount is not contingent liability as liability is already recorded in books.
so we have to check whether liability / provision is already recorded before recording contingent liability.
generally we have liability to pay in books (eg liability to pay for import) , bank has guarantee that company will pay for imports, company has given counter guarantee to bank. Now as original liability is already recorded no need to record contingent liability