ICC Digital Library Forum

Hi, I'd like to get yr opinion on how to classify AP guarantee - financial or non-financial?

What is yr practice?
a) classify in accordance to guarantee's wording (i.e., if it secures returning of advance payment - financial; if it secures fulfillment of particular obligations (non-payment) - non-financial), or
b) put them under 'financial guarantees" category, or
c) put them under 'non-financial guarantees' category.

Thank you,
Irena

No, It is not a financial guarantee. A financial guarantee which is called also payment guarantee is used as security for a payment obligation in connection with a contract of sale, a loan, or a note or any other financial commitment.

Regards,
Antoine

Why would one seek to qualify a 'guarantee' as being 'financial' or 'non-financial'? Is it a regulatory requirement?

Irena -
It depends on the underlying obligation. If it is a non-financial obligation (e.g. contract for installation of a power generator), it is akin to a performance bond and therefore should be classified as non-financial. However, if it is simply to guarantee the repayment of an advance payment, then clearly it should be classified as financial.

Jeremy -
It makes a difference under Basel II as financial guarantees consume more regulatory capital than non-financial guarantees.

Regards, Gabriel

Gabriel,
I think an advance payment guarantee (also called repayment guarantee) cannot be considered as financial since it covers the obligation of a party to deliver the performance promised in the contract, just like a performance guarantee. Whereas a payment guarantee is classified as financial as it covers the payment obligation relating to the price of furnished goods/services or the reimbursement of a facility or the payment of a receivable such as accounts payable by a distributor/agent or promissory notes ....

Regards,
Antoine

I mean the AP guarantee covers the obligation by the guaranteed party to reimburse any amount paid to him in advance for the delivery of goods/services if that delivery is not performed as per the contract terms. So, it is linked to the performance of the contract.

Regards,
Antoine