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.
Examples of Guarantees
As an example of a guarantee, a company provides a guarantee for the debt of a joint venture in which it is an investor. Similarly, a guarantee may be issued by a corporate parent for the debt of a subsidiary. Or, a parent guarantees a car loan issued to a child.
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.