Both Surety Bonds (SBs) and Bank Guarantees (BGs) serve as credit assurances to third parties (obligees) that a company (the principal) will meet its obligations. However, they differ in structure and their impact on a company’s finances. A bank guarantee is issued by a bank (often requiring collateral or credit limits), whereas a surety bond is issued by an insurance company (surety) typically based on the company’s creditworthiness rather than blocking funds . From an accounting perspective, both instruments usually remain off-balance sheet as contingent liabilities until a default occurs . This opinion outlines the balance sheet treatment, accounting entries, financial ratio impact, and compliance considerations when comparing SBs and BGs, to guide CFOs and financial leaders in decision-making.
Under Ind AS 37 / IAS 37, obligations like performance guarantees and surety bonds are considered contingent liabilities – a possible obligation that arises from past events, which is not recognized as a liability because either the outflow of resources is not probable or the amount cannot be reliably measured. In practice, a performance guarantee (whether a BG or SB) is disclosed in the financial statements unless the possibility of an outflow is remote . No liability is recorded initially on the balance sheet for the guaranteed amount. The company simply notes the existence and amount of the guarantee or bond in the contingent liability section of the notes, as required by Ind AS 37. For example, a note might read: “Contingent Liabilities: ₹100 million performance guarantees outstanding” .
Because these guarantees are obligations triggered by a future uncertain event (the company’s non-performance), they remain off-balance sheet initially . No entry is made to recognize a liability at inception. Only if and when it becomes probable that the company will default (i.e. likely that the guarantee will be invoked) does Ind AS 37 require booking a provision (a liability) for the expected payout . In summary:
It’s important to distinguish financial guarantees (guarantees of payment of debt/loans) from performance-based guarantees. Under Ind AS, financial guarantee contracts (e.g. a parent company guaranteeing a subsidiary’s loan or a guarantee of payment obligations) fall under the scope of financial instruments (Ind AS 109) rather than Ind AS 37. These are not treated as mere contingencies – they are recognized on the balance sheet at fair value when issued . In contrast, performance guarantees and surety bonds (which guarantee execution of a contract or performance standards) do fall under Ind AS 37 as contingent liabilities . Thus, a surety bond guaranteeing project performance would be disclosed but not recognised, whereas a guarantee of a financial debt might need recognition under Ind AS 109. Under previous Indian GAAP (IGAAP), typically both financial and performance guarantees were treated off-balance sheet (only disclosed) until a payout was probable, but Ind AS has narrowed that gap by bringing financial guarantees into active recognition .
On consolidated financial statements, the treatment remains the same – disclose contingent liabilities for guarantees/bonds across the group. If multiple subsidiaries have surety bonds, the consolidated notes would aggregate these contingent liabilities (eliminating any intra-group guarantees). There is no double-counting – e.g. if a parent guarantees a subsidiary’s performance (acting as surety itself), that intra-group guarantee isn’t shown in consolidated externals, only any external surety or guarantee to third parties is disclosed. Using multiple surety bonds does not create a recognised liability on the group balance sheet unless a payout becomes likely. However, auditors will ensure that the nature and total amount of all SBs/BGs outstanding are clearly disclosed, as required by Ind AS 37 (usually with a description of each material guarantee). In essence, neither surety bonds nor bank guarantees appear as liabilities in the balance sheet at inception – they appear in the notes as contingent commitments .
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Example: Accounting Entries for BG vs SB
To illustrate, consider a scenario where a company must provide a ₹100 lakh performance guarantee for a contract:
Using a Bank Guarantee: The company approaches its bank to issue a ₹100 lakh BG to the customer (beneficiary). The bank may require, say, a 50% cash margin (₹50 lakh) and will charge an annual commission (assume 2% of the amount).
Using a Surety Bond: The company obtains a ₹100 lakh surety bond from an insurer (surety) instead of a bank. Assume the surety charges a premium of 4% for the bond (₹4 lakh) and no collateral is required (common for surety, as it’s generally unsecured based on the contractor’s financial strength) .
Throughout, whether using a BG or SB, the key is that until a payment obligation is likely or triggered, the only reflection in the financial statements is in the notes (contingent liability). Under Ind AS 37, the company should disclose a brief description of the guarantee, the amount, and any relevant conditions or uncertainties . For example: “The Company’s outstanding performance guarantees (secured by bank guarantees and surety bonds) aggregate to ₹500 million as of March 31, 2025. These are being disclosed as contingent liabilities, as management does not expect any material defaults on the underlying contracts.” If the likelihood of default is assessed as more than remote, some companies also disclose that evaluation (e.g. “management believes the risk of invocation is low”). Only if a provision is recorded (for a probable loss) would that amount move from contingent liability note to the balance sheet (with appropriate description in provisions note per Ind AS 37).