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23.6 Guarantees
Publication date: 30 Nov 2021
us Financial statement presentation guide 23.6
With a few exceptions, ASC 460 applies to the following type of guarantee contracts.
Excerpt from ASC 460-10-15-4
- Contracts that contingently require a guarantor to make payments… to a guaranteed party based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party…
- Contracts that contingently require a guarantor to make payments… to a guaranteed party based on another entity's failure to perform under an obligating agreement (performance guarantees)...
- Indemnification agreements (contracts) that contingently require an indemnifying party (guarantor) to make payments to an indemnified party (guaranteed party) based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party.
- Indirect guarantees of the indebtedness of others, even though the payment to the guaranteed party may not be based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party.
ASC 460 does not apply to the following types of guarantee contracts.
Excerpt from ASC 460-10-15-7
- A guarantee or an indemnification that is excluded from the scope of Topic 450 (see paragraph 450-20-15-2—primarily employment-related guarantees)
- A lessee’s guarantee of the residual value of the underlying asset at the expiration of the lease term under Topic 842
- A contract that meets the characteristics in paragraph 460-10-15-4(a) but is accounted for as variable lease payments under Topic 842
- A guarantee (or an indemnification) that is issued by either an insurance entity or a reinsurance entity and accounted for under Topic 944 (including guarantees embedded in either insurance contracts or investment contracts)
- A contract that meets the characteristics in paragraph 460-10-15-4(a) but provides for payments that constitute a vendor rebate (by the guarantor) based on either the sales revenues of, or the number of units sold by, the guaranteed party
- A contract that provides for payments that constitute a vendor rebate (by the guarantor) based on the volume of purchases by the buyer (because the underlying relates to an asset of the seller, not the buyer who receives the rebates)
- A guarantee or an indemnification whose existence prevents the guarantor from being able to either account for a transaction as the sale of an asset that is related to the guarantee's underlying or recognize in earnings the profit from that sale transaction
- A registration payment arrangement within the scope of Subtopic 825-20 (see Section 825-20-15)
- A guarantee or an indemnification of an entity's own future performance (for example, a guarantee that the guarantor will not take a certain future action)
- A guarantee that is accounted for as a credit derivative at fair value under Topic 815.
- A sales incentive program in which a manufacturer contractually guarantees to reacquire the equipment at a guaranteed price or guaranteed prices at a specified time, or at specified time periods (for example, the entity is obligated to reacquire the equipment or the entity is obligated at the customer’s request to reacquire the equipment). That program shall be evaluated in accordance with Topic 606 on revenue from contracts with customers, specifically the implementation guidance on repurchase agreements in paragraphs 606-10-55-66 through 55-78.
For guarantees that fall within the scope of ASC 460, guarantors are required to recognize a liability equal to the fair value of the guarantee upon its issuance and to provide specific disclosures related to the guarantee. Guarantors may be excluded from the scope of the initial liability recognition provisions included in ASC 460-10-25-1 depending on the type of guarantee; however, the disclosure requirements outlined in ASC 460 may still be required.
The disclosures required by ASC 460 do not eliminate or affect disclosure requirements under other applicable guidance, such as disclosures required under:
- ASC 825 related to disclosures of the fair value of financial guarantees
- ASC 450 related to disclosures for contingent losses that have a reasonable possibility of occurring
- ASC 815 related to guarantees accounted for as derivatives
- ASC 275 for disclosures of significant risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term
23.6.1 ASC 460 disclosure requirements
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.
ASC 460-10-50-2 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 intercompany guarantee disclosure requirements.
EXAMPLE FSP 23-2
Intercompany guarantees
FSP Corp provides a guarantee on a loan that Sub Co has received from a third party bank. FSP Corp issues consolidated financial statements that include Sub Co. In addition, Sub Co issues stand-alone financial statements.
Which reporting entity's financial statements should include disclosure about the intercompany guarantee?
Analysis
As the issuer of the guarantee, FSP Corp must include disclosure of the guarantee in any parent company financial statements it issues. Although Sub Co is not required to disclose FSP Corp's guarantee of its debt in Sub Co's stand-alone financial statements, we believe Sub Co should disclose the parent's guarantee so users of Sub Co's financial statements have an understanding of Sub Co's liquidity.
23.6.2 Fair value disclosures
Reporting entities that issue guarantees must also consider the disclosure requirements set forth in ASC 825, Financial Instruments. The disclosure requirements vary depending on whether a reporting entity is an SEC registrant or a private company.
See FSP 20 for more on fair value disclosure requirements.
23.6.3 Joint and several liability
Under joint and several liability, the total amount of an obligation is enforceable against any of the parties to the arrangement. For example, under joint and several liability in a lending arrangement, the lender can demand payment in accordance with the terms of the arrangement for the total amount of the obligation from any of the obligors or any combination of the obligors. An obligor cannot refuse to perform on the basis that it individually only borrowed a portion of the total, nor that other parties are also obligated to perform. However, the paying obligor may be able to pursue repayment from the other obligors, depending on the agreement among the co-obligors and the laws covering the arrangement.
ASC 405-40, Obligations Resulting from Joint and Several Liability Arrangements, addresses disclosure of obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The guidance does not address obligations resulting from joint and several liability arrangements that are specifically addressed within other existing guidance, such as asset retirement and environmental obligations (see FSP 11), contingencies (see FSP 23.4), compensation retirement benefits (see FSP 13), and taxes (see FSP 16).
23.6.3.1 Disclosure requirements
As discussed in ASC 405-40-50-1, a reporting entity is required to disclose for each liability or each group of similar liabilities resulting from joint and several liability arrangements:
- The nature of the arrangement, including how the liability arose, the relationship with other co-obligors, and the terms and conditions of the arrangement
- The total amount outstanding, which cannot be reduced by the effect of any amounts that may be recoverable from other co-obligors, under the arrangement
- The carrying amount, if any, of the reporting entity's liability and the carrying amount of any receivable recognized
- The nature of any recourse provision that would allow for recovery from other entities of amounts paid, including any limitations on the potential recovery of amounts
- In the period of initial recognition and measurement or in a period the measurement of the liability changes significantly, the corresponding entry and where it was recorded in the financial statements
While not addressed in the guidance, we would encourage reporting entities to disclose the undiscounted amount of the liability, as well as the discount rate used, if discounted.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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