Letter of comfort may be treated as guarantee

NEW DELHI: The state governments which have been issuing letters of comfort fairly generously to corporations promoted by it and for special purpose vehicles may now be stopped in their tracks.
The Government Accounting Standards Advisory Board (GASAB), in its first exposure draft on the proposed government accounting standard on sovereign guarantees, has taken the view that the letter of comfort issued by the government may be treated as good as an implicit guarantee.
This view is in line with the one taken by the technical committee on state government guarantees, which had recommended that state governments should eschew the practice of providing letters of comfort. The implicit guarantees provided by state governments could be disclosed in the budget and included in some form or other in the accounting of the stock of contingent liabilities.
The accounting standard becomes effective in respect of financial statements prepared and presented on or after April 1, ’03, according to a finance ministry release. The aim of the proposed government accounting standard on guarantees is to provide complete disclosure of guarantees given by governments in their financial statements. Contingent liabilities arising from social benefits are, however, excluded from this purview, the release said.