Contingencies and Commitments Including Contingencies and Commitments Including Off Balance Sheet Items

Contingencies and Commitments Including Off Balance Sheet Items

26. A bank shall disclose the following contingent liabilities and commitments:

(a) the nature and amount of commitments to extend credit that are irrevocable because they cannot be withdrawn at the discretion of the bank without the risk of incurring significant penalty or expense; and

(b) the nature and amount of contingent liabilities and commitments arising from off balance sheet items including those relating to:

(i) direct credit substitutes including general guarantees of indebtedness, bank acceptance guarantees and standby letters of credit serving as financial guarantees for loans and securities;

(ii) certain transaction-related contingent liabilities including performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions;

(iii) short-term self-liquidating trade-related contingent liabilities arising from the movement of goods, such as documentary credits where the underlying shipment is used as security; and

(iv) [Deleted by the IASB]

(v) [Deleted by the IASB]

(vi) other commitments, note issuance facilities and revolving underwriting facilities.

27. AASB 137 Provisions, Contingent Liabilities and Contingent Assets deals generally with accounting for, and disclosure of, contingent liabilities. The Standard is of particular relevance to banks because banks often become engaged in many types of contingent liabilities and commitments, some revocable and others irrevocable, which are frequently significant in amount and substantially larger than those of other commercial entities.

28. Many banks also enter into transactions that are presently not recognised as assets or liabilities in the balance sheet but which give rise to contingencies and commitments. Such off balance sheet items often represent an important part of the business of a bank and may have a significant bearing on the level of risk to which the bank is exposed. These items may add to, or reduce, other risks, for example by hedging assets or liabilities on the balance sheet.

29. The users of the financial report need to know about the contingencies and irrevocable commitments of a bank because of the demands they may put on its liquidity and solvency and the inherent possibility of potential losses. Users also require adequate information about the nature and amount of off balance sheet transactions undertaken by a bank.