In a situation where your company is facing some potential financial difficulties or is going to face a possible liability that’s so big if paying it, it would mean bankruptcy, there’s an option to receive a promise from the owners or similar to get full financial support if a situation arises. Essentially what’s done, is an agreement between two parties where one side promises to support and the other is agreeing and acknowledging the receipt of such support.

Depending on the reason the support was given – either as something to assure your creditors or some particular financial institution, the first thing you should do, is make sure that the appropriate party is informed of such a support. It’s needless to say I presume that you won’t go about and advertise it publicly, but if asked and if questioned, you’d say that to the other party. It could be that financial institutions or auditors who have suggest for such a support letter, may ask for a copy.

The second bit is obviously the accounting treatment. A simple answer in this case is that there is none. Such support is not recognized in the accounts on its own. If the support says that your company will not bare any expenses relating to a specific matter, the expenses and liability are not recognized in the accounts either. Should that however not be the case and the support only states that should your company need financial support, they would come and help, there isn’t anything special about it. It’s just an agreement that will come into force should a situation arise. Other than that you carry on business as usual. If it’s for specific expenses, those expenses should not be recognized.

Disclosure in the annual report is something that’s mostly up to the decision of the management. If the support is given because the financial results question the company’s ability to continue as a going concern, it’s useful to disclose that such support was received. If it’s for a specific expense or situation it may be more reasonable to not disclose the support, however.