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23.3 Commitments
Publication date: 30 Nov 2023
us Financial statement presentation guide
Although ASC 440 is the prevailing guidance related to commitments, it does not address presentation matters. For SEC registrants, S-X 5-02 (25) requires commercial and industrial companies to include the caption “Commitments and contingent liabilities” on the balance sheet. The SEC staff requires this caption to appear on the balance sheet whenever a footnote bears such a title or one that is similar. If no such footnote exists or the only disclosed commitments are, immaterial items, then the caption need not appear on the balance sheet.
23.3.1 General commitments
As discussed in ASC 440-10-50-1, the financial statement footnotes must include disclosure of the following items:
- Unused letters of credit (see FSP 12)
- Leases (see FSP 14)
- Assets pledged as security for loans (see FSP 12)
- Pension plans (see FSP 13)
- The existence of cumulative preferred stock dividends in arrears (see FSP 5)
Additionally, as discussed in ASC 440-10-50-1(f), reporting entities should disclose commitments, including those related to a commitment to acquire a plant, an obligation to reduce debts, an obligation to maintain working capital, or an obligation to restrict dividends.
23.3.2 Unconditional purchase obligations
Unconditional purchase obligations, such as take-or-pay contracts and through-put contracts, are types of commitments for which specific disclosures are required. An unconditional purchase obligation that has all of the following characteristics is required to be disclosed:
Excerpt from ASC 440-10-50-2
- It is noncancelable, or cancelable only in any of the following circumstances:
- Upon the occurrence of some remote contingency
- With the permission of the other party
- If a replacement agreement is signed between the same parties
- Upon payment of a penalty in an amount such that continuation of the agreement appears reasonably assured.
- It was negotiated as part of arranging financing for the facilities that will provide the contracted goods or services or for costs related to those goods or services (for example, carrying costs for contracted goods). A purchaser is not required to investigate whether a supplier used an unconditional purchase obligation to help secure financing, if the purchaser would otherwise be unaware of that fact.
- It has a remaining term in excess of one year
As discussed in ASC 440-10-50-3, future lease payments that might otherwise constitute an unconditional purchase obligation using the criteria in ASC 440-10-50-2 are not required to be disclosed as long as the required lease disclosures are met. See Question FSP 23-1 and FSP 14.3.3.2A.
The nature and extent of the required disclosures related to unconditional purchase obligations will vary depending on whether these commitments are unrecognized or recognized.
23.3.2.1 Unrecognized unconditional purchase obligations
As discussed in ASC 440-10-50-4, the following disclosures are required for unconditional purchase obligations that have not been recognized on the balance sheet, unless the aggregate commitment for all such obligations is immaterial:
- The nature and term of the commitment
- The aggregate amount of the purchase obligation that is fixed and determinable as of the balance sheet date and for each of the five succeeding years (if determinable)
- The nature of any variable components of the commitment
- The amounts purchased under the purchase obligation for each period that an income statement is presented
ASC 440-10-50-5 encourages, but does not require, reporting entities to disclose the amount of imputed interest necessary to reduce the unrecognized unconditional purchase obligations to present value. The discount rate should be the initial effective interest rate of the borrowings that financed the facility that will provide the goods or services, if known. If the discount rate is not known, the reporting entity should use its incremental borrowing rate at the time the commitment originated.
An unconditional purchase obligation may also be subject to the provisions of ASC 815, Derivatives and Hedging, if the obligation meets the definition of a derivative. In this instance, reporting entities would follow the disclosure requirements of both ASC 440 and ASC 815, as discussed in ASC 440-10-50-7. See DH 2 and DH 3 for discussion of purchase commitments as derivatives.
23.3.2.2 Recognized unconditional purchase obligations
For unconditional purchase obligations recorded on the balance sheet, reporting entities must disclose the aggregate amount of payments for the obligations for each of the five years following the balance sheet date, as discussed in ASC 440-10-50-6.
23.3.3 Other unrecognized commitments
A reporting entity may also have unrecognized commitments other than unconditional purchase obligations that may require disclosure based on other guidance depending on the nature of the underlying obligation. For example, there are specific disclosure requirements for leases, as illustrated by question FSP 23-1 for a lease that has not yet commenced.
Question FSP 23-1
Is a lease not yet recorded by the lessee (because the lease term has not yet commenced) subject to disclosure requirements?
Is a lease not yet recorded by the lessee (because the lease term has not yet commenced) subject to disclosure requirements?
PwC response
Yes. While general lease disclosure requirements are provided under ASC 440-10-50-1, ASC 842-20-50-3 requires specific disclosure of information about leases that have not yet commenced but that create significant rights and obligations for the lessee. For example, consider a lease that is signed on November 1; however, the term of the lease and usage of the leased property begin the following February 1 and the lessor will retain possession and control of the property through January 31. The classification of the lease, as either finance or operating, should be determined as of November 1, the date of the inception of the lease. The lessee should record the lease at the beginning of the lease term, February 1; however, the lease represents a commitment that, if material, should be disclosed at any intervening financial statement dates.
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