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Performance bonds accounting treatment


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Hello all, I have queries on performance bonds here. From what I see and understand, this serve as insurance and confidence for those developers before pumping their money in.

However, as we are not required to pay out the amount unless the contract are not carried out, is there any constructive obligation in the first place? we are required to set aside some funds for this, but all these funds are not going to be used if everything goes smoothly right?

I am kinda new in the working industry and would need guidances in how to treat and record this events. no cash is credited from the bank side, but we are not allowed to use the money as it need to be keep aside in the event that we need to pay it out.
 

bklynboy

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My company has a surety business and issues performance bonds among others. The accounting is to set aside a reserve based on past experience (your own if availabel or industry experience) and also take into account any recoveries you may have. For instance, we typically ask for collateral in the event of default and reduces/eliminates any liability you may incur. You do not set up a liability for the face amount issued unless/until you believe a loss will be incurred. We treat this as FAS 60 contracts - so you may want to review that guidance to see how it applies to your instance.
 
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thanks alot for the reply,

indeed it is as you said that we had set aside a reserve, but I am not sure about the past experience, will check on the industry comparison for that.

For now, before recording as liability, what do we put or treat it as?

Edit : the fund set aside would count as collateral, is that right? do we record or set it as provision? the company do not have a very good credit
 
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