A guarantee occurs when an entity accepts responsibility for an obligation if the party with primary responsibility is unable to settle the obligation. It is most commonly given to a related party, where the guarantor has an interest in the financial success of the related party. For example, a guarantee may be issued by a company for the debt of a joint venture in which it is an investor. Similarly, a guarantee may be issued by a corporate parent for the debt of a subsidiary.
A guarantee can create a liability for the guarantor that may need to be recognized, if the amount of the eventual payment can be reasonably determined and the payment is probable.