BC5. At the January 17, 2013 EITF meeting, the Task Force considered the feedback received on the proposed Update for this Issue. A majority of the respondents supported the recognition, measurement, and disclosure requirements in the proposed Update. Based on the feedback received, the Task Force decided to affirm the proposed guidance, excluding the requirement to assess whether the primary role of the entity is that of a guarantor.
BC6. The Task Force decided that this Update should apply to obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of guidance is fixed at the reporting date. Liabilities subject to a measurement uncertainty are excluded from the scope and should continue to be accounted for under the guidance in Topic 450 or other U.S. GAAP. This Update includes the phrase total amount under the arrangement is fixed at the reporting date in the scope description to indicate that an obligation is within the scope of this Update if the total amount of the obligation is fixed at the balance sheet date even when the total amount under the arrangement may change subsequently because of factors that are unrelated to measurement uncertainty. For example, the amount may be fixed at the reporting date but change in future periods because an additional amount was borrowed under a line of credit for which an entity is jointly and severally liable or because the interest rate on a joint and several liability arrangement changed.
BC7. The Task Force concluded that the scope of this Update should apply to all joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, regardless of the relationship among parties involved in the arrangement. The Task Force concluded that there was not a basis to exclude joint and several liability arrangements involving unrelated parties from the scope of this Update and that, if those arrangements were excluded, unrelated parties would apply this guidance by analogy, since there is no specific U.S. GAAP for them to apply.
BC8. The Task Force considered whether an entity that is jointly and severally liable should apply the guidance in Topic 460. Under that guidance, an entity is required to recognize and measure the fair value of the stand-ready obligation as well as recognize and measure a loss contingency under Subtopic 450-20. Some Task Force members said that this approach may be appropriate because there are economic similarities between obligations that result from joint and several liability arrangements and those that are guarantees, and, therefore, the recognition and measurement approaches should be similar. Other Task Force members said that different recognition and measurement approaches were appropriate for obligations that result from joint and several liability arrangements and those that are guarantees because there are differences between the two types of obligations. One of the significant differences between a joint and several liability arrangement and a guarantee arrangement is that an entity is a primary obligor under a joint and several liability arrangement and is a secondary obligor under a guarantee arrangement. In addition, those Task Force members were concerned about the cost and complexity of measuring the fair value of the stand-ready obligation for joint and several liability arrangements. Some said that the costs and complexity of measuring the fair value of the stand-ready obligation could be greater for obligations that are the result of a joint and several liability arrangement than for those that are guarantees because often there is no explicit consideration exchanged between entities that are parties to a joint and several liability arrangement. Those Task Force members noted that entities under common control are excluded from the requirement to recognize and measure the fair value of the stand-ready obligation under Topic 460 because there were concerns about measuring the fair value of the stand-ready obligation when there often is no explicit consideration exchanged for a guarantee involving entities under common control. Because this difficulty often may exist for joint and several liability arrangements, the Task Force also concluded there was a basis for not requiring a stand-ready obligation in the measurement of the liability resulting from the joint and several liability arrangement unless the primary role of the reporting entity was that of a guarantor.
BC9. Under the amendments in the proposed Update, the recognition, measurement, and disclosure requirements would not include joint and several liability arrangements in which the primary role of a reporting entity in the arrangement is that of a guarantor. At the time the Task Force proposed those amendments, it had decided that if the primary role of the reporting entity was that of a guarantor, then even if the obligation legally was a joint and several liability, the accounting for that arrangement should be the same as for guarantees under Topic 460. The Task Force included one indicator in the proposed Update, which was that the reporting entity received explicit consideration for standing ready. Some respondents to the proposed Update said that it was unclear whether the Task Force intended for other joint and several liability arrangements (for which the reporting entity received no explicit consideration) to be accounted for under Topic 460, and, if so, what those other arrangements are. The Task Force considered those comments, but it was not able to identify additional indicators that could be applied broadly and consistently in practice. In addition, the Task Force observed that the accounting for many of those obligations would be similar to the guidance in this Update and Topic 460, because many of those arrangements are among entities under common control. Consequently, the Task Force decided to remove the requirement from this Update that joint and several liability arrangements in which the primary role of a reporting entity in the arrangement is that of a guarantor should be accounted for under Topic 460.
BC10. Another approach considered by the Task Force would have required an entity that is jointly and severally liable to recognize and measure the obligation as the total amount under the joint and several liability arrangement regardless of the amount an entity expected to pay to fulfill the obligation. Some Task Force members were concerned that this approach would not result in decision-useful information for users of financial statements because the amount may be inconsistent with expected cash outflows associated with the obligation.
BC11. In the proposed Update, the measurement guidance was linked to the guidance for loss contingencies in Subtopic 450-20. The Task Force decided that the guidance on accounting for obligations with joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date should be included in Subtopic 405-40, rather than linked to another Subtopic, because the Task Force thought it would be easier to apply the guidance in practice. In addition, the Task Force noted that the recognition criteria in Subtopic 450-20 are not relevant for the arrangements within the scope of this Update. The Task Force concluded that the initial and subsequent measurement should be the sum of:
- The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors
- Any additional amount the reporting entity expects to pay on behalf of its co-obligors. If some amount within a range of the additional amount the reporting entity expects to pay is a better estimate than any other amount within the range, that amount should be the additional amount included in the measurement of the obligation. If no amount within the range is a better estimate than any other amount, then the minimum amount in the range should be the additional amount included in the measurement of the obligation.
BC12. The Task Force considered whether the amendments in this Update should include specific guidance about the corresponding entry or entries when recognizing and measuring a liability resulting from a joint and several liability arrangement. The Task Force concluded that the amendments should not prescribe a specific account or accounts for the corresponding entry or entries because the corresponding entry or entries will depend on the facts and circumstances of the arrangement and the Task Force did not think that guidance could be developed that would be specific enough to be useful to preparers of financial statements while being applicable in all circumstances. Examples of corresponding entries include, but are not limited to, cash for proceeds from a debt arrangement, an expense for a legal settlement, a receivable (that is assessed for impairment) for a contractual arrangement, and an equity transaction with an entity under common control. In instances in which a legal or contractual arrangement exists to recover amounts funded under a joint and several obligation from the co-obligors, the Task Force noted that a receivable could be recognized at the time the corresponding liability is established. That receivable would need to be assessed for impairment. When no legal or contractual arrangement exists to recover the funded amounts from the co-obligors, the Task Force noted that an entity should consider all relevant facts and circumstances to determine whether the gain contingencies guidance in Subtopic 450-30 or other guidance would apply in recognizing a receivable for potential recoveries.
BC13. The Task Force concluded that the disclosure requirements in the amendments in this Update would be beneficial to users of financial statements because of the inherent uncertainty associated with measuring obligations resulting from joint and several liability arrangements. Those disclosure requirements are consistent with the disclosure requirements for guarantees in Topic 460.