Guarantee definition
/What is a Guarantee?
A guarantee occurs when an entity accepts responsibility for an obligation if the party with primary responsibility is unable to settle the obligation. It is most commonly given to a related party, where the guarantor has an interest in the financial success of the related party. A guarantee can also be an assurance provided by one party to another to uphold certain conditions, standards, or outcomes. Guarantees help build trust between businesses and their customers, partners, or stakeholders.
Examples of Guarantees
Several examples of guarantees are as follows:
Debt guarantee for a joint venture. A company provides a guarantee for the debt of a joint venture in which it is an investor.
Debt guarantee for a subsidiary. A corporate parent guarantees the debt of a subsidiary.
Product quality guarantee. A manufacturer guarantees that their product is free from defects in materials and workmanship for a specified period.
Money-back guarantee. Retailers or service providers promise a full refund if the customer is unsatisfied with the product or service.
On-time delivery guarantee. Businesses commit to delivering goods or services within a specified time frame, offering compensation if they fail to meet the deadline.
Performance guarantee. Service providers assure clients that their services will meet agreed-upon performance metrics or standards.
Price match guarantee. A retailer promises to match the price of a competitor for the same product if the customer finds it at a lower price.
Satisfaction guarantee. Businesses promise that customers will be completely satisfied with a product or service, or they will take corrective action.
Financial performance guarantee. A contractor or supplier guarantees the completion of a project within budgetary constraints or specific financial terms.
Extended warranty guarantee. Businesses offer guarantees beyond the standard warranty period for an additional fee.
Sustainability guarantee. Companies guarantee that their products or processes meet ethical, fair trade, or sustainability standards.
Accounting for a Guarantee
A guarantee can create a liability for the guarantor that may need to be recognized, if the amount of the eventual payment can be reasonably determined and the payment is probable. If these criteria are not met, it may still be necessary to mention the guarantee in the footnotes accompanying the financial statements.