Guarantors are required to disclose certain information about each guarantee, or group of similar guarantees. ASC 460
is silent as to whether the disclosures relate to the current period only, or to comparative periods presented in the financial statements. Our view is that comparative disclosures are required for each of the following for all periods for which a balance sheet is presented:
- The nature of the guarantee including:
- Approximate term
- How it originated
- Events and circumstances that would require performance
- Current status (as of the balance sheet date) of the payment/performance risk
If a reporting entity uses internal groupings for disclosure of the payment/performance risk status of its guarantees, it must disclose how such groupings are determined and used for managing risk.
- The maximum potential amount of future payments (undiscounted) that the guarantor could be required to make under the guarantee. With regard to this disclosure:
- The amount of potential future payments should not be reduced by any potential recoveries under collateralization or recourse provisions in the guarantee.
- If there is no limitation to the maximum potential future payments based on the terms of the guarantee, then this fact must be disclosed.
- If the amount of the maximum estimated future payments under the guarantee cannot be estimated, the guarantor must disclose this fact along with the reasons for why an estimate cannot be determined.
- The current carrying amount of any guarantor's obligations under the guarantee (including any amount recognized under the contingency guidance within ASC 450 or ASC 326-20 on financial instruments measured at amortized cost). This disclosure is required regardless of whether the guarantee is freestanding or embedded within another contract.
- The nature of recourse provisions, if any, that would allow the guarantor to recover amounts paid under the guarantee. A reporting entity should also consider disclosing the value of any recovery that could occur, such as from the guarantor's right to proceed against an outside party, if the amount is estimable.
- The nature of any assets held either by third parties or as collateral that the guarantor could obtain to recover amounts paid under the guarantee, upon the occurrence of any triggering event or condition.
- The approximate extent to which the proceeds from the liquidation of assets held either by third parties or as collateral would cover the maximum potential future payments under the guarantee, if such amount is estimable.
The information outlined above is required to be disclosed even when there is a remote probability of the guarantor making any payments under the guarantee or group of guarantees. ASC 460
states the following:
An entity shall disclose certain loss contingencies even though the possibility of loss may be remote. The common characteristic of those contingencies is a guarantee that provides a right to proceed against an outside party in the event that the guarantor is called on to satisfy the guarantee. Examples include the following:
- Guarantees of indebtedness of others, including indirect guarantees of indebtedness of others
- Obligations of commercial banks under standby letters of credit
- Guarantees to repurchase receivables (or, in some cases, to repurchase the related property) that have been sold or otherwise assigned
- Other agreements that in substance have the same guarantee characteristic.
Guarantees issued by a reporting entity to benefit related parties, such as equity method investees and joint ventures, require incremental disclosures pursuant to ASC 850
, Related Party Disclosures.
Additionally, guarantees of a reporting entity's indebtedness by its principal shareholders or other related parties should be disclosed, if material, as required by ASC 850-10-50
. Although not in the scope of ASC 460
, we believe that guarantees obtained by a reporting entity (as opposed to those made by it) should also be disclosed, as such disclosures may indicate that the reporting entity is not able to obtain financing without the guarantees of others.
requires disclosure of guarantees of the indebtedness of others, including indirect guarantees as defined therein. In addition, the recognition and disclosure requirements of ASC 460
apply to such indirect guarantees if they are legally binding.
The following is an example of the disclosure requirements for a parent’s guarantee of a subsidiary’s debt.
EXAMPLE FSP 23-2
FSP Corp, the parent, guarantees repayment of a loan that its subsidiary, Sub Co, receives from a third-party bank. FSP Corp issues consolidated financial statements that include Sub Co and Sub Co issues standalone financial statements.
Which reporting entity’s financial statements should include disclosure about the guarantee?
In the consolidated financial statements, the guarantee issued by FSP Corp on the loan that Sub Co received from the third-party bank is eligible for the scope exception in ASC 460-10-15-7(i)
as described in ASC 460-10-55-18(c)
and, therefore, would not require disclosure. If FSP Corp issues parent-only financial statements, however, disclosure of the guarantee would be required. Although Sub Co is not required to disclose FSP Corp’s guarantee of its debt in Sub Co’s standalone financial statements, we believe Sub Co should consider disclose the parent’s guarantee so users of Sub Co’s financial statements have an understanding of Sub Co’s liquidity.
See FSP 31
for additional presentation and disclosure requirements for parent company financial statements. See FSP 26
for further discussion of related party transactions.