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STAFF PAPER
April 18, 2016
Project
Transition Resource Group for Revenue Recognition
Paper topic
Scoping Considerations for Financial Institutions
CONTACT(S)
Rob Moynihan
rmoynihan@fasb.org
+1 203 956 5239
Nick Burgmeier
nburgmeier@fasb.org
+1 203 956 3436
Andrew Thornburg
athornburg@fasb.org
+1 203 956 5344
Kramer Holle
kkholle@fasb.org
+1 203 956 3462
This paper has been prepared for discussion at a public meeting of the Transition Resource Group for Revenue Recognition. It does not purport to represent the views of any individual members of the board or staff. Comments on the application of U.S. GAAP do not purport to set out acceptable or unacceptable application of U.S. GAAP. Stakeholders are strongly encouraged to listen to feedback about this staff paper from TRG members and Board members during the TRG meeting and to read the meeting summary, which will be prepared by the staff after the meeting.
Purpose
1. Some stakeholders in the depository institutions industry informed the staff that there are questions about the guidance in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“Update 2014-09” or “the Update”), regarding the scope of the new revenue standard for certain activities and certain fees for servicing and sub-servicing, deposits, and financial guarantees.
2. The specific questions arose from U.S. stakeholders and relate to the interaction of Topic 606 with other existing GAAP.
Background
3. Topic 606 defines the types of arrangements with customers that are within its scope, as well as arrangements outside of its scope. In defining the scope of Topic 606, the Board acknowledged that some arrangements with customers have unique considerations that are specifically addressed in other areas of GAAP. The Board excluded those arrangements with customers because Topic 606 might not be appropriate in addressing unique accounting issues for those arrangements.
4. Depository institutions perform a variety of activities and earn a variety of fees for those activities. The industry submitted questions to the staff about whether a few specific activities and fees are included or excluded from the scope of Topic 606.
Accounting Guidance
5. Update 2014-09 includes the following guidance for the scope of Topic 606, and the basis for conclusions (BC) describes the Board’s considerations regarding scope:
606-10-15-2 An entity shall apply the guidance in this Topic to all contracts with customers, except the following:
c. Financial instruments and other contractual rights or obligations within the scope of the following Topics:
  1. Topic 310, Receivables
  2. Topic 320, Investments—Debt and Equity Securities
  3. Topic 323, Investments—Equity Method and Joint Ventures
  4. Topic 325, Investments—Other
  5. Topic 405, Liabilities
  6. Topic 470, Debt
  7. Topic 815, Derivatives and Hedging
  8. Topic 825, Financial Instruments
  9. Topic 860, Transfers and Servicing
d. Guarantees (other than product or service warranties)within the scope of Topic 460, Guarantees...
606-10-15-4 A contract with a customer may be partially within the scope of this Topic and partially within the scope of other Topics listed in paragraph 606-10-15-2.
  1. If the other Topics specify how to separate and/or initially measure one or more parts of the contract, then an entity shall first apply the separation and/or measurement guidance in those Topics. An entity shall exclude from the transaction price the amount of the part (or parts) of the contract that are initially measured in accordance with other Topics and shall apply paragraphs 606-10-32-28 through 32-41 to allocate the amount of the transaction price that remains (if any) to each performance obligation within the scope of this Topic and to any other parts of the contract identified by paragraph 606-10-15-4(b).
  2. If the other Topics do not specify how to separate and/or initially measure one or more parts of the contract, then the entity shall apply the guidance in this Topic to separate and/or initially measure the part (or parts) of the contract.
BC61. Some respondents asked the FASB to clarify what is meant by “contractual rights or obligations” in paragraph 606-10-15-2 because those respondents stated that it is unclear whether financial instrument arrangements that are addressed elsewhere in the Codification, such as letters of credit and loan commitments (addressed in Topic 440, Commitments), would be included within the scope of Topic 606. The FASB noted that its intention is that if specific guidance in other topics of the Codification deal with a transaction, the more detailed guidance from those other Topics should be applied rather than the guidance in Topic 606. For example, the FASB decided to exclude from the scope of Topic 606 guarantees (other than product warranties) that are within the scope of Topic 460, Guarantees, because the focus of the existing accounting guidance for those guarantee arrangements primarily relates to recognizing and measuring a guarantee liability. [Emphasis added.]
Question 1: Is servicing and sub-servicing income within the scope of Topic 606?
6. Some financial institutions originate loans (primarily mortgage loans) and subsequently sell them to third parties (for example, government-sponsored entities that securitize large quantities of similar loan assets). When a financial institution sells the loan to a third party, it sometimes retains the right to service the financial asset. Additionally, entities may acquire or assume the rights to service financial assets.
7. The entity that services a loan (servicer) performs various services, such as communication with the borrower and collection of interest, principal, and escrow payments. The level of service provided by the servicer depends on the type of loan and contractually specified terms. In exchange for servicing the loan, the servicer receives a contractually specified servicing fee. The servicer also could be compensated for their servicing activities through late fees as well as interest income earned on cash received and held before being remitted to another party (sometimes referred to as float).
8. In addition, a servicer might engage another entity (sub-servicer) to perform certain servicing tasks based on a contractual agreement. Unless otherwise noted in this paper, references to servicing income contemplate both servicing and subservicing income.
9. Paragraph 606-10-15-2(c) contains a scope exception for financial instruments and other contractual rights or obligations within the scope of Topic 860, Transfers and Servicing. Subtopic 860-50 (referred to as “Topic 860” for the remainder of this paper) requires that an intangible asset or liability be initially recognized, at fair value, when the expected future servicing cash flows (that is, the benefits of servicing) are in excess of the going market rate for those services (defined as adequate compensation in Topic 860). If the servicing fees over the life of the servicing contract are expected to provide the servicer with more than adequate compensation, then the servicer recognizes an asset; if it is expected to be less than adequate compensation, then the servicer recognizes a liability. These assets or liabilities must be either remeasured at fair value each period or amortized over the course of the servicing contract. If an entity uses the amortization method, it must assess servicing assets or servicing liabilities for impairment or increased obligation at each reporting date. Total expected cash flows (which reflect expectations of collectibility) from the servicing fee are a key input into the measurement of the asset or liability.
10. Regardless of whether a servicing asset or liability exists (or is measured at zero in the event that the servicing income is equal to adequate compensation), the servicer is entitled to the contractually specified servicing fee each period. The staff’s understanding is that under current practice, servicers generally record servicing income as it is received. In some situations, servicers consider the principles for revenue recognition in SEC Staff Accounting Bulletin (SAB) Topic 13, Revenue Recognition. For example, an entity may consider whether amounts are fixed or determinable and collectibility is reasonably assured before recognizing revenue.
11. While Topic 860 includes detailed guidance on the initial recognition and subsequent measurement of servicing assets and liabilities, it does not include explicit guidance describing the revenue recognition of contractually specified servicing fees. However, based on the guidance in Topic 860 that requires a fair value estimate (or evaluation of impairment) at each reporting date, some stakeholders noted that the subsequent measurement guidance in Topic 860 provides implicit guidance on how to account for the servicing cash flows; that is, they view the remeasurement of the asset/liability and the collection of servicing fees (which gives rise to recording of the servicing income) as being closely linked. In a typical servicing arrangement, the servicer generally receives and records servicing fees as income each period. During each period, an amortization or remeasurement entry is made for the mortgage servicing right (MSR) asset/liability, which takes into account the receipt (or nonreceipt) of the servicing income for that period. The servicing income, including expectations of future servicing cash flows, are inputs for the measurement of the MSR asset/liability. The net result on the income statement is that the servicer records the contractual cash received in each period as income, offset by the amortization or remeasurement of the MSR asset/liability. Topic 860 describes the subsequent measurement of the MSR asset/liability. See Appendix A for excerpts of the guidance related to that process.
12. While this paper references mortgage servicing rights, the staff thinks the concepts behind servicing income and the scoping considerations would apply similarly to other types of servicing assets beyond mortgages (such as auto loans), presuming the servicing arrangements are in the scope of Topic 860.
13. The staff is aware of the following views for how to account for servicing income: (a) servicing income is not within the scope of Topic 606, and (b) servicing income is within the scope of Topic 606.
View A -Servicing income is outside the scope of Topic 606
14. Some stakeholders assert that servicing income is outside the scope of Topic 606 because servicing rights and obligations are accounted for under Topic 860, which is outside the scope of Topic 606 per paragraph 606-10-15-2(c). While there is no explicit fee recognition guidance in Topic 860, the subsequent degradation of the value of the servicing asset or liability (whether under amortized cost or fair value) is the direct result of the collection of servicing fees. Proponents of this view observe that Topic 860 provides guidance on recognition of the fees in excess of adequate compensation and, by doing so, it implies how to account for the adequate compensation component of the servicing fees. Those stakeholders assert that the model in Topic 860 is premised on an initial measurement of all discounted servicing cash flows, which is adjusted to remove the portion of the cash flows related to adequate compensation, to determine the value of the MSR asset/liability. By not including adequate compensation in the initial measurement of the MSR asset/liability, the model is designed such that adequate compensation is reflected in earnings in each subsequent period, which is determined as the difference between total servicing cash flows and the change in value of the MSR asset/liability.
15. Some stakeholders indicated that the MSR model combines a financial instrument attribute with a service attribute because the collection of cash flows related to services performed directly impacts the measurement of the MSR asset/liability. This connection between the servicing asset and the servicing fees indicates that the entire arrangement is outside the scope of Topic 606.
16. Proponents of View A further asserted that the portion of servicing income that exceeds adequate compensation (in the case of a servicing asset) represents a realization or collection of the intangible asset/liability that is required to be recognized under Topic 860. When the servicer collects/realizes the projected cash flows, the MSR asset/liability value is reduced by way of amortization or remeasurement in order to remove those cash flows from the measurement of the intangible asset/liability. As discussed above, the MSR measurement contemplates the projected gross servicing fees and discounts the projection to derive a net present value. The amortization or remeasurement represents the decline in the net present value of the MSR, as the servicer removes the current period’s contractually specified servicing fees from the valuation. As the gross servicing cash flows associated with the MSR are realized through the income statement, the amortization or remeasurement of the discounted MSR value partially offsets the gross cash flows to derive the net performance (which should reflect adequate compensation) on the MSR asset/liability. If valuation inputs (such as prepayment and delinquency rates) for the MSR asset/liability are constant from period to period, the amortization or remeasurement of the MSR asset/liability over time primarily is due to collection of servicing fees that exceed adequate compensation (or in the case of a servicing liability, the amount below adequate compensation). Under this view, the servicing cash flows and the MSR asset/liability are linked and supporters of View A asserted that it would not be sensible to have a different accounting model for the MSR remeasurement and the collection/realization of the actual cash flows.
17. Proponents of this view asserted that calculation of an MSR asset/liability is based on expected cash flows and is remeasured or amortized based on many factors, including cash collection or the absence of cash collection (for example, a debtor that is not making payments when due). Application of Topic 606 potentially could produce recognition outcomes that differ from timing of those cash flows. These stakeholders noted that it is not logical to have two different models to account for the same cash flow stream.
18. Proponents of this view mentioned that Topic 860 is a unique accounting model in that it requires an entity to recognize an asset or liability based on future servicing cash flows, thereby combining aspects of accounting for financial instruments and provision of services. Proponents of View A also note that there is not any substantive diversity in practice or significant practice issues with the accounting for servicing income today, and the specific MSR disclosure requirements within Topic 860 provide sufficient information about the arrangements. Therefore, they assert that Topic 860 provides sufficient guidance to account for the entire arrangement.
View B -Servicing income is within the scope of Topic 606
19. Some stakeholders assert this view is most appropriate because there is no explicit revenue recognition guidance in Topic 860. Stakeholders with this view use similar reasoning to View C in the analysis below about the scope of deposit fees. Under this view, Topic 860 does not provide explicit guidance for recognizing revenue associated with fulfilling an entity’s obligations that arise from the servicing arrangement; therefore, the default model for recognizing the entire revenue related to the servicing fees (that is, the gross servicing fee revenue before reflecting amortization or remeasurement of the MSR asset/liability) would be Topic 606. Under this view, in addition to applying Topic 606, an entity would continue to follow Topic 860 to account for initial recognition and subsequent measurement of the MSR asset/liability, as well as provide disclosures required by Topic 860 that are incremental to the disclosures required by Topic 606.
Implementation Considerations for View B
20. The staff has considered the outcomes that would result from applying Topic 606 to servicing fees. Below is a summary of the staff’s considerations. However, an entity would need to consider its specific contracts and facts and circumstances to apply Topic 606 if the arrangement is within the scope of Topic 606.
Series Provision
21. If the servicing arrangement was within the scope of Topic 606, the entity would need to consider whether the nature of the promise in the contract is a single performance obligation that consists of a series of distinct services accordance with paragraph 606-10-25-14(b). The staff thinks there are similarities between these arrangements and services that are considered a series in the new revenue standard (that is, asset management and hotel management services) as well as in TRG Agenda Ref No. 39 (transaction processing and outsourcing). An entity might be able to conclude that the nature of the promise is a single integrated service of loan administration over the contract term that consists of a series of distinct daily services.
22. See also TRG Agenda Ref No. 27 for further discussion about the identification of performance obligations and applicability of the series provision.
Variable Consideration
23. The staff understands that the consideration received under these contracts is variable consideration. That is because the amount the entity collects each month and over the contract term is contingent upon and varies based on the timing of collection. For example, the unpaid principal balance can change as a result of scheduled payments or partial or full prepayments. If the criteria in paragraph 606-10-32-40 to allocate variable consideration to a distinct service within a series are met, the entity would allocate the variable fees resolved each month to the period in which they relate and recognize them in that same month. Refer to TRG Agenda Ref No. 39 for further analysis that might be helpful.
Other Views Considered
24. The staff considered a third view whereby a portion of servicing income is within the scope of Topic 606 and a portion is within Topic 860. Under this view, using an example of a servicing asset, the portion of servicing income that is at or below adequate compensation would be accounted for under Topic 606, while the servicing income in excess of adequate compensation (which represents realization or collection of the intangible asset that Topic 860 requires an entity to recognize) would be accounted for under Topic 860. While this view could be applied using guidance in paragraph 606-10-15-4 (see paragraph 5 of this paper), the staff believes that bifurcating the cash flow and accounting for the single cash flow under both Topic 860 and Topic 606 would be problematic for several reasons. The staff note that the entire servicing cash flow needs to be evaluated (in conjunction with the measure of adequate compensation) to measure the MSR asset/liability. The staff acknowledges that only applying Topic 606 to a portion of the cash flows received could be operationally difficult, particularly because the amount determined to be adequate compensation can change from period to period (which could lead to the MSR asset turning into a MSR liability or vice versa). Therefore, the amount of cash flows presented as revenue recognized under Topic 606 could fluctuate on the basis of changes in the market rate for adequate compensation.
Staff Analysis
25. In the staff’s view, servicing arrangements that are within the scope of Topic 860 (which is not something that should change as a result of Topic 606) are not within the scope of Topic 606. The staff acknowledges the different views about what those servicing cash flows represent (revenue versus realization of an intangible asset/liability) and thinks there is merit to the assertion that Topic 860 provides guidance on how to reflect the servicing cash flows via subsequent measurement of the MSR asset/liability. In reaching its view, the staff placed weight on the following factors:
(a) Topic 860 is included within the scope exceptions of Topic 606 in paragraph 606-10-15-2. The guidance in Topic 860 is an accounting model (including disclosure requirements) that evolved over the course of previous standard setting that requires servicing arrangements to be recognized on the balance sheet akin to a financial asset, and allows for an entity to measure the MSR asset/liability at fair value each reporting period.
(b) Topic 860 includes disclosure requirements for servicing arrangements, including the total servicing fees received and a disaggregation of the different components. Topic 860 also includes disclosures relating to assumptions used to calculate fair value, which would incorporate all servicing cash flows, including the inputs related to adequate compensation.
(c) Recognition outcomes under Topic 606 (if the services are considered a series in accordance with paragraph 606-10-25-15 and the variable consideration meets the criteria in paragraph 606-10-32-40 to be allocated to each increment of service (for example, a month)) likely would be similar to the way in which practice applies Topic 860.
(d) Applying Topic 606 to servicing arrangements could lead to practice questions (and potentially amendments to Topic 860), specifically with regards to the notion that expected cash flows currently factor into the measurement of the MSR asset/liability rather than the recognized revenue amounts. Those would be two different bases (actual cash flows and revenue per Topic 606) upon which the same cash flow stream in the same contract is recognized/measured.
26. However, in the staff’s view, it would not be concerning if an entity that applies Topic 860 refers to the accounting framework described in Topic 606 to assist with recognition conclusions for servicing income or to provide the disclosures required by Topic 606 to the extent they are applicable and incremental to the disclosure requirements of Topic 860.
27. The staff also considered other fact patterns raised by stakeholders in the context of this scoping question:
(a) Residual fees or income related to servicing (for example, nonsufficient funds charges and modification fees). The staff believes that the scoping framework described above also would apply to those fees because they are all considered benefits of servicing and, therefore, are incorporated into the measurement of the MSR asset/liability.
(b) Income earned in situations in which a servicing asset is not obtained or a service liability is not incurred under Topic 860. The scope of Topic 860 includes transactions in which servicing assets are obtained and servicing liabilities are incurred, including transactions in which loans are transferred with servicing retained by the transferor. If a servicing arrangement is not within the scope of Topic 860, the staff thinks it is clear on the basis of the scoping guidance in paragraph 606-10-15-2 that all servicing (or subservicing) income would be within the scope of Topic 606. Determining whether servicing or sub-servicing arrangements are within the scope of Topic 860 is beyond the scope of this paper. The staff thinks that even if the amounts of servicing income are determined at the reporting date to be at adequate compensation (and, therefore, no servicing asset or servicing liability is recorded), an entity would need to still consider the various requirements in Topic 860; therefore, these arrangements would be outside the scope of Topic 606.
(c) Servicing asset/liability subsequent measurement at fair value versus amortized cost. Under either method, the periodic reductions in the MSR asset/liability in accordance with the subsequent measurement guidance in Topic 860 reflect only the difference between the actual fees and adequate compensation; therefore, the staff thinks that the servicer’s election regarding how to remeasure the MSR asset/liability does not affect the scoping considerations described above.
(d) Hedging. The staff notes that some entities utilize hedging strategies to offset the income statement volatility of the MSR asset/liability remeasurement, but the staff thinks this is irrelevant to the scoping analysis for the servicing income.
(e) Borrower non-payment and servicing advances. When borrowers do not make payments on a loan, stakeholders have expressed that servicing income may not be recorded yet in relation to that particular loan, and the lack of payment is reflected in the measurement of the MSR asset/liability. Meanwhile, servicing agreements may require the servicer to make payments (advances) to the loan owner or investors, during any period when the borrower does not make payments. Servicers often are entitled to recover those advances either from the borrower, loan owner or investor, or other third parties. The staff thinks that the existence of these arrangements does not affect the scoping analysis described above; however, entities may need to use judgment to consider whether revenue recognition of the servicing income is appropriate when the promised servicing inflows are not received from the borrower.
Question for the TRG Members
  1. Do the TRG members agree with the staff’s view?
Question 2: Are deposit-related fees within the scope of Topic 606?
28. The Master Glossary of the Accounting Standards Codification defines a financial liability as “a contract that imposes on one entity an obligation to do either of the following: (a) deliver cash or another financial instrument to a second entity, or (b) exchange other financial instruments on potentially unfavorable terms with the second entity.” When a customer deposits money with a depository institution (bank), the bank recognizes a liability that typically would be accounted for under Topic 405, Liabilities, because the bank generally has an obligation to deliver cash to the customer upon demand.
29. As part of the depository agreement, the financial institution generally is obligated to provide the customer with access to the deposited funds, serve as a custodian of the funds, and when applicable, pay interest on the deposits. Customers can access deposited funds through a variety of mechanisms and customers sometimes have to pay a fee (for example, customers might pay fees for use of an ATM or a cashier’s check). Financial institutions sometimes charge customers fees that are not specifically related to the customer accessing its funds, such as account maintenance or dormancy fees.
30. The amount of deposit fees assessed varies based on a number of factors, such as the type of customer and account, the quantity of transactions, and the size of the deposit balance. Financial institutions charge, and in some circumstances do not charge, fees to earn additional revenue and influence certain customer behavior. An example is a bank that does not charge a monthly service fee, or does not charge for certain transactions, for customers that have a high deposit balance. Deposit fees can be considered either transactional in nature (such as ATM fees, wire transfers, foreign exchange, and stop payment orders) or non-transactional (such as account maintenance and dormancy fees).
31. Questions have arisen about whether services arising from depository arrangements and the related fees are within the scope of Topic 606 or if they are excluded from the scope of Topic 606 and are, instead, within the scope of another Topic, such as Topic 405.
32. The staff is aware of the following views regarding the scope for these depositrelated fees:
(a) View A - Deposit fees and charges are not within the scope of Topic 606.Proponents of this view asserted that deposit fees and charges are linked to an agreement that is not within the scope of Topic 606. While acknowledging that Topic 405 does not provide revenue recognition guidance, supporters of View A indicated that the deposit account is a financial liability within the scope of Topic 405, and fees and charges are imposed on depositors to compensate the financial institution for the services performed for the depositor under the contractual rights and obligations of the deposit account (access to funds, custody, etc.). Because of this depository relationship with the customer, the fees and charges related to customer deposits are outside of the scope of Topic 606. Proponents of this view asserted that a bank’s obligation to provide access to customer funds already is being accounted for as a contractual depository obligation that falls under Topic 405.
However, stakeholders who support this view acknowledged that fees charged to non-deposit customers would be within the scope of Topic 606 (for example, non-depositor using the financial institution’s ATM for a fee). This is because no depositor relationship exists and it is a fee for performing a service.
(b) View B- Certain deposit fees and charges are within the scope of Topic 606. Some stakeholders indicated that fees for services arising from transactiontype activities, such as providing access to funds through an ATM and wire requests, would be considered within the scope of Topic 606. However, proponents of this view asserted that fees for services that do not specifically provide the customer with access to deposited funds, such as account maintenance or dormancy charges, are not within the scope of Topic 606. The basis for the view is that such non-transactional fees merely encourage certain customer behavior (for example, to maintain certain minimum balances), instead of providing a separate service to customers.
(c) View C - All deposit fees are within the scope of Topic 606. Proponents of this view noted that Topic 405 only addresses the accounting for the deposit liability and does not have a model to follow for recognizing revenue from deposit-related transactions. Paragraphs BC61–BC63 in Update 2014-09 clarify that the Board’s intent in creating the new revenue standard was to develop a single, comprehensive framework for all contracts with customers. Scope exceptions were provided because the Board recognized that several areas of GAAP have guidance on how to deal with subsequent income measurement that contemplates the unique risks associated with those transactions. Proponents asserted that given the absence of specific revenue recognition guidance elsewhere, financial institutions should apply Topic 606 as the framework to account for deposit-related fee income. Proponents also observed that there are performance obligations underlying the various nontransactional fees noted above, which include providing ongoing access to and safekeeping funds.
Staff Analysis
33. The staff’s view is that deposit fees are within the scope of Topic 606 (View C). The scope exception in paragraph 606-10-15-2 only relates to the deposit liability (that is, Topic 405 only addresses the accounting for the deposits that the customer gives to the financial institution, not the related fees). In the staff’s view, the lack of guidance for deposit fees in Topic 405 (or other areas of GAAP) means that Topic 606 is the only applicable guidance to apply. This view aligns with the Board’s intent described in paragraph BC61 that contractual rights or obligations that fall under other Topics, where specific guidance exists in those topics, would not be within the scope of Topic 606. The staff understands that under current GAAP, in the absence of specific detailed application guidance in Topic 405, some financial institutions apply the principles within SAB Topic 13, codified as paragraph 605-10-S99-1, for guidance on how to account for the deposit-related fees. In addition, the staff understands that those fees commonly are presented as revenue (that is, non-interest income).
34. View A or View B would create a gap in accounting literature because a financial institution would not have revenue recognition guidance for deposit-related services. It is not clear to the staff what accounting framework would be followed for revenue recognition purposes if Topic 606 was not utilized. While the staff thinks most of the arrangements in this topic are straightforward (for example, a customer uses an ATM and pays a fee), the staff thinks that if the fees were excluded from the scope of Topic 606, then some stakeholders might look to other, potentially more complex GAAP. For example, some might look to Subtopic 835-30, Interest—Imputation of Interest, to evaluate the fees and impute the amounts into the recognized financial liability or related interest income/expense, which could create significant complexity. The staff also notes operability concerns with identifying what transactions are deemed to be transactional versus non-transactional in the context of View B, particularly as banks continue to offer new products or services. View B also could lead to diversity in practice unless the Board undertook standard-setting activity to determine how to distinguish which types of fees for services would be outside the scope of Topic 606. In summary, if these activities and fees are not accounted for under Topic 606, the staff thinks that subsequent questions could arise on what the appropriate accounting treatment should be for these fees.
35. The staff has considered scoping questions from other industries as part of the FASB’s implementation activities. The staff encourages stakeholders to read TRG Agenda Ref No. 36 on Credit Card Scoping from the July 2015 TRG meeting. Because Topic 310, Receivables, includes revenue recognition guidance, fees from credit cards generally are not within the scope of Topic 606. Additionally, stakeholders from the insurance industry have discussed with the staff whether various activities (and a portion of the insurance premium) that relate directly to the insurance obligation (for example, processing insurance claims or activities that mitigate the insurer’s risk) are within the scope of Topic 606. Those stakeholders noted that those type of activities are not within the scope of Topic 606 primarily because Topic 944, Financial Services—Insurance, includes revenue recognition guidance and those insurance contracts are listed as being outside the scope of Topic 606. The key differentiator between the scoping considerations for (a) credit card programs and insurance-related activities and (b) deposit-related fees is that there is no revenue recognition guidance contained in other Topics for deposit-related fees. Therefore, as described in paragraph BC61 of Update 2014-09, Topic 606 should be used to account for those depositrelated fees.
Implementation Considerations for View C
36. Some stakeholders asserted that application of Topic 606 for deposit-related fees likely would not lead to significantly different recognition and measurement outcomes when compared with current practice. Considering the straightforward nature of the arrangements, this assertion intuitively seems reasonable to the staff (although the staff, of course, is not familiar with how every entity accounts for the fees today).
37. However, some stakeholders have raised concerns that some in practice might think that (a) significant changes could result from applying Topic 606 and/or (b) financial institutions might need to engage in significant implementation efforts to adopt Topic 606 for deposit fees.
38. To try to be helpful to stakeholders and potentially reduce the implementation effort, the staff has included below some considerations related to applying Topic 606 to deposit fees.
Contract term and optional purchases
39. An entity applies the new revenue standard to the contract term. The contract term can have a significant effect on the application of Topic 606 because it affects the identification of promised goods or services, the transaction price, and the allocation of the transaction price (among other things).
40. When evaluating the contract term, stakeholders can consider previous discussions held by the TRG. At the October 31, 2014 TRG meeting (Agenda Ref No. 10, the TRG discussed the accounting for termination clauses in a contract when each party has the unilateral right to terminate the contract by compensating the other party. At that meeting, TRG members supported the view that the legally enforceable contract period should be considered the contract period and that the contract exists throughout the period covered by substantive termination penalties. Additionally, as described further in TRG Agenda Ref No. 10 the staff thinks that if a contract can be terminated by each party at any time without compensating the other party for the termination (that is, other than paying amounts due as a result of goods or services transferred up to the termination date), the duration of the contract does not extend beyond the goods or services already transferred. This is the case whether or not the contract has a specified contract period.
41. At the November 2015 TRG meeting, TRG members (Agenda Ref No. 48 discussed evaluating the contract term when only the customer has the right to terminate the contract. TRG members agreed with the staff’s analysis that the views expressed at the October 2014 TRG meeting would be consistent regardless of whether both parties can terminate or whether only one party can terminate. That is, the contract term exists throughout the period covered by substantive termination penalties. If the contract does not involve a termination penalty (or the penalty was not substantive), an entity would account for the termination right similar to a renewal option and evaluate whether the option gives rise to a material right.
42. The staff understands that customers generally have the right to cancel their depository arrangements (and retrieve their deposited funds) at any time without penalties compensating the other party. As a result, the contract term would be a day-to-day (or minute-to-minute) contract in which the termination clause is akin to a renewal right, and each day (or minute) represents a renewal of the contract. The staff understands that some arrangements provide both parties with a unilateral right to terminate without compensating the other party. If the contract term is determined to be daily, then the recognition outcomes likely would be similar regardless of the number of performance obligations identified.
43. Consider the following example:
Example 1
An entity enters into a depository contract with a customer under which the entity continues to provide services until the contract is terminated. Each party can immediately terminate the contract without compensating the other party for the termination (that is, there is no termination penalty). In month 1, the customer executes an outgoing wire transfer and the entity charges a fee of $10. In month 2, the customer uses an ATM of another financial institution and the entity charges the customer $3.
The duration of the depository contract does not extend beyond the services already provided. This is because either party can cancel the contract without compensating the other party. The relationship is, in effect, a day-to-day contract.
Because the contract does not extend beyond the services performed, the entity would recognize revenue for the wire transfer fees in month 1 (for example, at the end of month 1 there is no future contract under which to allocate consideration) and the ATM fees in month 2.
44. Also consider the following example:
Example 2
Assume the same facts as Example 1 and the following additional facts. The entity charges the customer a monthly account maintenance fee of $5 unless the customer meets one of the agreed upon criteria (for example, the customer receives a direct deposit at least once a month or the customer maintains a minimum average daily balance). On occasion, a customer will raise a customer service issue, and the entity has a past practice of agreeing to rebate some or all of the $5 fee. Based on the entity’s historical experience, about 3% of maintenance fees are refunded to customers.
The staff thinks the following is a reasonable application of Topic 606 to this fact pattern:
With respect to the monthly fee, the entity would recognize revenue of $5 each month if it is entitled to the fee because the customer did not meet one of the agreed-upon criteria. Because the contract term does not extend beyond the services already provided (either party can immediately terminate the contract without compensating the other party), the entity would not need to make estimates about future monthly fees from a customer (that is, project whether or not the customer will meet one of the criteria). Instead, the entity would recognize revenue for the maintenance fee if the customer does not meet one of the criteria and it would not recognize revenue for the maintenance fee if the customer meets one of the criteria. The entity would consider whether it should reduce the transaction price for refunds given to customers who raise a customer service issue. Based on the entity’s historical experience, it reduces the total maintenance fee revenue (transaction price) by 3% per month (if the item is material).
With respect to the fee of $10 for executing an outgoing wire transfer and $3 for using the ATM of another financial institution, the entity would account for those fees the same as Example 1. The entity would recognize revenue for the wire transfer fees and ATM fees when the services are performed.
45. The staff thinks limiting the amounts recognized as revenue to the amounts under the current contract is consistent with paragraph BC186 in Update 2014-09, which states:
The Boards clarified that the transaction price should include only amounts (including variable amounts) to which the entity has rights under the present contract. For example, the transaction price does not include estimates of consideration from the future exercise of options for additional goods or services or from future change orders. Until the customer exercises the option or agrees to the change order, the entity does not have a right to consideration. (Emphasis added.)
Transaction price
46. Some stakeholders asked the staff about applying Topic 606 to deposit account fee structures whereby some customers pay fees and other customers pay no fees (or pay reduced fees). In those situations, some stakeholders questioned how to determine the transaction price when the amount of expected cash consideration (zero) is not equal to the price an entity charges other customers. Some stakeholders questioned whether the application of Topic 606 would lead to a financial statement gross up by recognizing revenue with an equal offset to interest expense.
47. For “premier” customers for which no fees are charged, the staff think an entity should consider the guidance for determining the transaction price (Step 3 of the new revenue guidance), which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. In these situations, the only consideration received by the entity is the customer’s deposit, which can be used for lending or other purposes; however, the deposit itself is outside the scope of Topic 606.
48. The staff’s understanding is that these arrangements do not include an enforceable right whereby an entity is entitled to fees from premier customers. While some might view the customer providing the bank with a deposit as similar to a loan that might require an adjustment to the transaction price as a significant financing component under Topic 606, the staff thinks those stakeholders should consider the short-term nature of the contract, which likely would indicate that the financing component is not significant because there is not a long period of time between payment and transfer of the services. Furthermore, entities could avail themselves of the practical expedient for contracts under one year.
49. Consistent with current practice, the staff thinks there are no fees within the scope of Topic 606 if no fees are charged because the entity is not entitled to fees (in the form of cash or noncash consideration). Consider the following example. During the first day of the month, the premier customer could access its funds many times and pay no fees (despite other customers paying fees to access funds in a similar manner). Immediately thereafter the premier customer could terminate the contract and the entity is entitled to no consideration from the premier customer for all of the access that occurs on the first day of the month.
50. In addition, the staff understand this gross-up approach is not applied in practice today, and Topic 606 did not change the accounting for interest on deposit liabilities.
Disclosures
51. The staff also considered the implications of applying View C related to the disclosure requirements in Topic 606. Some of the staff’s thoughts about the application of some of the disclosure requirements in Topic 606 are below. However, an entity will need to evaluate the applicability of all of the disclosure requirements in Topic 606 to its specific contracts and facts and circumstances (for example, consider whether deposit fee revenue is material in considering the appropriate level of disclosure).
52. If a depository arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, then the duration of the contract does not extend beyond the services performed. Because of the short duration, several of the disclosures in Topic 606 would not apply. For example, contract balances and remaining performance obligations related to the depository arrangements might not exist, so the disclosures in paragraphs 606-10-50-8 through 50-11, and paragraphs 606-10-50-13 through 50-16 might not apply. Additionally, because an entity generally would not need to make many judgments that would significantly affect the amount and timing of deposit fee revenue, there might not be much to disclose about judgments (paragraphs 606-10-50-17 through 50-20).
53. However, it is possible that other disclosure requirements might be more likely to be applicable on the basis of the specific contracts and the facts and circumstances (for example, whether deposit fee revenue is material in considering the appropriate level of disclosure). Two examples include, but are not limited to, the following:
(a) Disaggregation of revenue (paragraphs 606-10-50-5 through 50-7) into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, as well as sufficient information to enable users to understand the relationship between the disclosure of disaggregated revenue and revenue information that is disclosed for each reportable segment, if an entity applies Topic 280 on segment reporting
(b) Information about an entity’s performance obligations (paragraph 606-10-50-12), including the nature of services and when the entity typically satisfies its performance obligations (for example, as services are rendered or upon completion of service).
54. This brief discussion on disclosure was meant to highlight that because of the straightforward nature of revenue recognition for deposit fees, the staff thinks that some of the disclosure requirements in Topic 606 would not be applicable. However, each entity will need to make an assessment for itself based on its specific contracts and facts and circumstances.
Questions for the TRG Members
2. Do TRG members agree with the staff’s view that deposit-related fees and charges are within the scope of Topic 606?
3. Do TRG members have any feedback about the staff’s analysis of the potential effect of applying Topic 606 to these transactions?
Question 3: Are fees from financial guarantees within the scope of Topic 606?
55. An example of a financial guarantee is when a creditor requires a borrower to obtain a guarantee from a third party. The party that guarantees the loan (for example, a financial institution) agrees to compensate the creditor for losses if the borrower defaults on the loan. In essence, the financial institution “lends” its creditworthiness to the borrower. In exchange for this service, the financial institution typically receives a fee, which is based on the risk characteristics of the loan and prospective borrower.
56. Paragraph 606-10-15-2(d) specifically identifies a scope exception from Topic 606 for “guarantees (other than product or service warranties) within the scope of Topic 460, Guarantees.” Financial guarantees generally are within the scope of Topic 460 unless they meet the scope exceptions listed in paragraph 460-10-15-7 (such as guarantees accounted for as a credit derivative under Topic 815) or are listed in paragraph 460-10-55-16(a) (such as commercial letters of credit which are akin to a loan commitment). This issue is focused only on guarantees that are within the scope of Topic 460.
57. Questions have arisen regarding how to account for guarantee fees upon the issuance of Update 2014-09 as stakeholders see a possible conflict in the literature. While guarantees that are within the scope of Topic 460 (other than product warranties) are listed among the scope exceptions for Topic 606, there are at least two instances within GAAP that imply that fees from financial guarantees should be accounted for under Topic 606:
(a) Paragraph 942-825-50-2 states that “a guarantor is required to disclose and account for a financial guarantee under Topic 606 on revenue from contracts with customers.”
(b) Paragraph 310-10-60-4 states that “for guidance on loan guarantees, in which an entity (guarantor) lends its creditworthiness to another party (borrower) for a fee, thereby enhancing that other party’s ability to borrow funds, see Topic 606 on revenue from contracts with customers.”
58. In the consequential amendments of Update 2014-09, the guidance in paragraph 460-10-60-8, which historically pointed to paragraphs 605-20-25-8 through 25-12 for recognition of guarantee fees, was superseded by the issuance of Update 2014-09.
59. Paragraph BC61 of Update 2014-09, when providing an example of how to apply the scoping literature in the Update, states that “the FASB decided to exclude from the scope of Topic 606 guarantees (other than product warranties). . .because the focus of the existing accounting guidance for those guarantee arrangements primarily relates to recognizing and measuring a guarantee liability.”
60. The staff is aware of the following views regarding how to account for fees related to financial guarantees:
(a) View A - Guarantee fees are not within the scope of Topic 606. Stakeholders with this view asserted that this is most appropriate because paragraph 606-10-15-2 identifies guarantee arrangements within the scope of Topic 460 or Topic 815 to be outside the scope of Topic 606. Furthermore, the fees for guarantees are not a separate service and performance obligation, but rather are an inextricable part of the guarantee arrangement that is within the scope of Topic 460 or Topic 815. Stakeholders with this view asserted that guarantee obligations represent a unique standready obligation, which is contemplated by existing guidance in Topic 460 or Topic 815.
(b) View B - Guarantee fees are within the scope of Topic 606. Stakeholders with this view asserted this is most appropriate because paragraph 310-1060-4 and paragraph 942-825-50-2 indicate that for circumstances in which an entity lends its creditworthiness to another entity, that entity should look to Topic 606 for guidance on how to account for those arrangements. Additionally, stakeholders observed that paragraph 460-10-35-2 states that Topic 460 does not provide comprehensive guidance regarding the circumstances in which each of the subsequent measurement methods described therein would be appropriate.
Staff Analysis
61. In the staff’s view, guarantees within the scope of Topic 460 or Topic 815 are not within the scope of Topic 606. The basis for the staff’s view is that paragraph 606-10-15-2 states that guarantees are not within the scope. In addition, the staff places weight on the Board’s intent, as described in paragraph BC61 of Update 2014-09. This paragraph specifically mentions guarantees as items that would be outside the scope of Topic 606. The fee would not be received unless the guarantee was made, and the guarantee liability is typically reduced (by a credit to earnings) as the guarantor is released from the risk under the guarantee. Topic 460 provides principles in paragraphs 460-10-35-1 through 35-2 (see Appendix B) on how to reflect the release from risk (and credit to earnings).
62. Depending on feedback from the TRG members and Board members at the TRG meeting, the staff likely will recommend to the Board that a technical correction be made to paragraph 942-825-50-2 and paragraph 310-10-60-4 to clarify the accounting treatment for fees from financial guarantees.
Question for the TRG Members
4. Do TRG members agree with the staff’s view that guarantees (other than product or service warranties) within the scope of Topic 460 or Topic 815 are not within the scope of Topic 606?
Appendix A - Servicing Assets and Liabilities (Subtopic 860-50)
Scope
860-50-15-3  The guidance in this Subtopic applies to transactions in which servicing assets are obtained and servicing liabilities are incurred, including transactions in which loans are transferred with servicing retained by the transferor.
Glossary (860-50-20)
Servicing Assets: A contract to service financial assets under which the benefits of servicing are expected to more than adequately compensate the servicer for performing the servicing. A servicing contract is either:
  1. Undertaken in conjunction with selling or securitizing the financial assets being serviced
  2. Purchased or assumed separately

Servicing Liabilities: A contract to service financial assets under which the estimated future revenues from contractually specified servicing fees, late charges, and other ancillary revenues (benefits of servicing) are not expected to adequately compensate the servicer for performing the servicing.
Initial Measurement
860-50-30-1 An entity shall initially measure at fair value, a servicing asset or servicing liability that qualifies for separate recognition regardless of whether explicit consideration was exchanged.
860-50-30-2 Typically, the benefits of servicing are expected to be more than adequate compensation to a servicer for performing the servicing, and the contract results in a servicing asset. However,if the benefits of servicing are not expected to adequately compensate a servicer for performing the servicing, the contract results in a servicing liability. Paragraph 860-50-35-1A states that a servicing asset may become a servicing liability, or vice versa, if circumstances change. The initial measure for servicing may be zero if the benefits of servicing are just adequate to compensate the servicer for its servicing responsibilities. A servicing contract that entitles the servicer to receive benefits of servicing just equal to adequate compensation, regardless of the servicer’s own servicing costs, does not result in recognizing a servicing asset or a servicing liability. A purchaser would neither pay nor receive payment to obtain the right to service for a rate just equal to adequate compensation.
860-50-30-3 The determination of whether the servicer is adequately compensated for servicing specified assets is based on the amount demanded by the marketplace, not the contractual amount to be paid to a replacement servicer. However, that contractual provision would be relevant for determining the amount of contractually specified servicing fees. Therefore, the amount that would be paid to a replacement servicer under the terms of the servicing contract can be more or less than adequate compensation.
860-50-30-4 Whether a servicing asset or servicing liability is recorded is a function of the marketplace, not the servicer’s cost of servicing. For example, a loss shall not be recognized if a servicing fee that is equal to or greater than adequate compensation is to be received but the servicer’s anticipated cost of servicing would exceed the fee.
860-50-30-6 When valuing the right to receive future cash flows from ancillary sources such as late fees, an entity shall estimate the value of the right to benefit from the cash flows of potential future transactions, not the value of the expected cash flows to be derived from future transactions.
860-50-30-7 Entities shall consider the nature of the assets being serviced as a factor in determining the fair value of a servicing asset or servicing liability. The types of assets being serviced affect the amount required to adequately compensate the servicer. Several variables, including the nature of the underlying assets, shall be considered in determining whether a servicer is adequately compensated. For example, the amount of effort required to service a home equity loan likely would be different from the amount of effort required to service a credit card receivable or a small business administration loan.
Subsequent Measurement
860-50-35-1 An entity shall subsequently measure each class of servicing assets and servicing liabilities using either of the following methods:
  1. Amortization method. Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income (if servicing revenues exceed servicing costs) or net servicing loss (if servicing costs exceed servicing revenues), and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.
  2. Fair value measurement method. Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value of servicing assets and servicing liabilities in earnings in the period in which the changes occur.
860-50-35-1A A servicing asset may become a servicing liability, or vice versa, if circumstances change.
860-50-35-2 The election described in paragraphs 860-50-35-1 through 35-5 shall be made separately for each class of servicing assets and servicing liabilities.
860-50-35-3 The following guidance applies to the election of a method for subsequent measurement of servicing assets and servicing liabilities:
  1. Once an entity elects the fair value measurement method for a class of servicing assets and servicing liabilities, that election shall not be reversed.
  2. Different elections can be made for different classes of servicing assets and servicing liabilities.
  3. Once a servicing asset or a servicing liability is reported in a class of servicing assets and servicing liabilities that an entity elects to subsequently measure at fair value, that servicing asset or servicing liability shall not be placed in a class of servicing assets and servicing liabilities that is subsequently measured using the amortization method.
  4. An entity may make an irrevocable decision to subsequently measure a class of servicing assets and servicing liabilities at fair value at the beginning of any fiscal year.
  5. Transferring servicing assets and servicing liabilities from a class subsequently measured using the amortization method to a class subsequently measured at fair value is permitted as of the beginning of any fiscal year. If an entity makes such a transfer, subsequent measurement of servicing assets and servicing liabilities at fair value shall be applied prospectively with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year to reflect the difference between the fair value and the carrying amount, net of any related valuation allowance, of the servicing assets and servicing liabilities that exist at the beginning of the fiscal year in which the entity makes the fair value election.
  6. If an entity recognizes a new class of servicing assets and servicing liabilities, and no servicing assets and servicing liabilities that would belong to this class had previously been recognized by the entity, the entity may elect to subsequently measure that new class of servicing assets and servicing liabilities at fair value at the date of initial recognition of those servicing assets and servicing liabilities.
860-50-35-4 An entity shall apply the same subsequent measurement method to each servicing asset and servicing liability in a class.
860-50-35-5 Classes of servicing assets and servicing liabilities shall be identified based on any of the following:
  1. The availability of market inputs used in determining the fair value of servicing assets or servicing liabilities
  2. An entity's method for managing the risks of its servicing assets or servicing liabilities.
860-50-35-6 Under the approach in the preceding paragraph, a servicer may or may not consider the major asset type of the underlying financial asset being serviced when identifying its classes of separately recognized servicing assets and servicing liabilities. Further, this approach for defining classes of servicing assets and servicing liabilities is not analogous to the stratification guidance for determining impairment of servicing assets or servicing liabilities that are subsequently measured using the amortization method.
860-50-35-7 An entity shall first identify its classes of separately recognized servicing assets and servicing liabilities under the approach in paragraph 860-50-35-5. For any class subsequently measured using the amortization method, an entity shall then stratify that class to determine if impairment has occurred, as discussed in paragraph 860-50-35-9(a).
860-50-35-8 The remainder of this Section discusses the following matters:
  1. Amortization method-measurement of impairment or increased obligation
  2. [Subparagraph superseded by Accounting Standards Update No. 2009-16]
  3. Obligation to service refinanced financial assets.
> Amortization Method-Measurement of Impairment or Increased Obligation
860-50-35-9 An entity shall evaluate and measure impairment of each class of separately recognized servicing assets that are subsequently measured using the amortization method described in paragraph 860-50-35-1(a) as follows:
  1. Stratify servicing assets within a class based on one or more of the predominant risk characteristics of the underlying financial assets. Those characteristics may include financial asset type, size, interest rate, date of origination, term, and geographic location. For mortgage loans, financial asset type refers to the various conventional or government guaranteed or insured mortgage loans and adjustable-rate or fixed-rate mortgage loans.
  2. Recognize impairment through a valuation allowance for an individual stratum. The amount of impairment recognized separately shall be the amount by which the carrying amount of servicing assets for a stratum exceeds their fair value. The fair value of servicing assets that have not been recognized shall not be used in the evaluation of impairment.
  3. Adjust the valuation allowance to reflect changes in the measurement of impairment after the initial measurement of impairment. Fair value in excess of the carrying amount of servicing assets for that stratum, however, shall not be recognized.
860-50-35-10 This Subtopic does not address when an entity should record a direct writedown of recognized servicing assets.
860-50-35-11 For servicing liabilities subsequently measured using the amortization method, if subsequent events have increased the fair value of the liability above the carrying amount, for example, because of significant changes in the amount or timing of actual or expected future cash flows relative to the cash flows previously projected, the servicer shall revise its earlier estimates and recognize the increased obligation as a loss in earnings. That is, if subsequent events increase the fair value of a stratum of servicing liabilities within a class that an entity has elected to subsequently measure using the amortization method, that increase shall be recognized in earnings as a loss. Similar to the accounting for changes in a valuation allowance for an impaired asset, increases in the servicing obligation may be recovered, but the obligation shall not be reduced below the amortized measurement of the initially recognized servicing liability.
860-50-35-12 The impairment provisions of paragraphs 860-50-35-9 and 860-50-3511 for classes of servicing assets and servicing liabilities subsequently measured using the amortization method are based on the fair value of the contract rather than the gain or loss from subsequently carrying out the terms of the contract.
860-50-35-13 An entity is not required to use either the most predominant risk characteristic or more than one predominant risk characteristic to stratify the servicing assets for purposes of evaluating and measuring impairment. An entity must exercise judgment when determining how to stratify servicing assets (that is, when selecting the most appropriate characteristic[s] for stratification). An entity may use different stratification criteria for the purposes of impairment testing under this Subtopic and for the purposes of grouping similar assets to be designated as a hedged portfolio in a fair value hedge under Subtopic 815-20. If an entity chooses not to restratify servicing assets for impairment testing under this Subtopic consistent with any restratification done for compliance with hedging criteria under Subtopic 815-20, the entity shall record any adjustments resulting from a fair value hedge to the risk strata used for impairment testing under paragraph 86050-35-9.
860-50-35-14 Once an entity has determined the predominant risk characteristics to be used in identifying the resulting stratums within each class of servicing assets subsequently measured using the amortization method, that decision shall be applied consistently unless significant changes in economic facts and circumstances clearly indicate that the predominant risk characteristics and resulting stratums should be changed. If a significant change in economic facts and circumstances occurs, that change shall be accounted for prospectively as a change in accounting estimate in accordance with paragraphs 250-1045-17 through 45-19 and 250-10-50-4.
Appendix B- Guarantees (Topic 460)
460-10-35-1 This Subsection does not describe in detail how the guarantor’s liability for its obligations under the guarantee would be measured after its initial recognition. The liability that the guarantor initially recognized under paragraph 460-10-25-4 would typically be reduced (by a credit to earnings) as the guarantor is released from risk under the guarantee.
460-10-35-2 Depending on the nature of the guarantee, the guarantor’s release from risk has typically been recognized over the term of the guarantee using one of the following three methods:
  1. Only upon either expiration or settlement of the guarantee
  2. By a systematic and rational amortization method
  3. As the fair value of the guarantee changes.
Although those three methods are currently being used in practice for subsequent accounting, this Subsection does not provide comprehensive guidance regarding the circumstances in which each of those methods would be appropriate. A guarantor is not free to choose any of the three methods in deciding how the liability for its obligations under the guarantee is measured subsequent to the initial recognition of that liability. A guarantor shall not use fair value in subsequently accounting for the liability for its obligations under a previously issued guarantee unless the use of that method can be justified under generally accepted accounting principles (GAAP). For example, fair value is used to subsequently measure guarantees accounted for as derivative instruments under Topic 815.
The Financial Accounting Standards Board (FASB) is an independent standard-setting body of the Financial Accounting Foundation, a not-for-profit corporation. The FASB is responsible for establishing Generally Accepted Accounting Principles (GAAP), standards of financial accounting that govern the preparation of financial reports by public and private companies and not-for-profit organizations in the United States and other jurisdictions. For more information visit www.fasb.org
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