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2.4 ASC 460 scope exceptions
Publication date: 31 Dec 2021
us Financing guide 2.4
ASC 460-10-15-7 provides a number of scope exceptions. When a reporting entity has a contract that is not in the scope of ASC 460, it should apply other applicable US GAAP. This can result in guarantees being accounted for using a variety of different accounting standards including leasing, revenue recognition, derivatives, and insurance.
ASC 460-10-15-7 [edits applicable upon adoption of ASC 842 or ASC 606]
The guidance in this Topic does not apply to the following types of guarantee contracts:
a. A guarantee or an indemnification that is excluded from the scope of Topic 450 (see paragraph 450-20-15-2—primarily employment-related guarantees).
b. A lessee's guarantee of the residual value of the leased property at the expiration of the lease term, if the lessee (guarantor) accounts for the lease as a capital lease under Subtopic 840-30. [A lessee’s guarantee of the residual value of the underlying asset at the expiration of the lease term under Topic 842.]
c. A contract that meets the characteristics in paragraph 460-10-15-4(a) but is accounted for as contingent rent under Subtopic 840-30. […as variable lease payments under Topic 842.]
d. 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).
e. 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.
f. 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.
g. 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.
h. A registration payment arrangement within the scope of Subtopic 825-20 (see Section 825-20-15).
i. 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).
j. A guarantee that is accounted for as a credit derivative at fair value under Topic 815.
k. [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.]
Employment related guarantees such as vacation pay, pension costs, deferred compensation contracts, and stock issued to employees are generally scoped out of ASC 460.
For more information on the application and effective dates of ASC 842 and ASC 606, see PwC’s guides on Leases and Revenue from contracts with customers, respectively.
2.4.1 Indemnification of officers and directors
A reporting entity may indemnify its officers or directors against litigation that arises in connection with the fulfillment of their normal functions. The indemnification is considered part of the officers' or directors' compensation package.
Since guarantees outside the scope of ASC 450 are also excluded from the scope of ASC 460, and ASC 450-20-15-2(a) excludes employment-related costs from its scope, indemnification of an officer or director against litigation is not within the scope of ASC 460.
2.4.2 Guarantees that prevent sale accounting
ASC 460-10-55-17 provides examples of guarantees that are outside the scope of ASC 460 because they prevent sale accounting.
ASC 460-10-55-17 [edits applicable upon adoption of ASC 842 or ASC 606]
The following are examples of contracts that are outside the scope of this Topic because they are of the type described in paragraph 460-10-15-7(g):
a. A seller’s guarantee of the return of a buyer’s investment or return on investment of a real estate property as discussed in paragraph 360-20-40-41 […for real estate sale-leaseback transactions]. [Subparagraph superseded by ASC 842]
b. A seller’s guarantee of a specified level of operations of a real estate property, as discussed in paragraphs 360-20-40-42 through 40-44 […for real estate sale-leaseback transactions]. [Subparagraph superseded by ASC 842]
c. A transaction that involves sale of a marketable security to a third-party buyer with the buyer having an option to put the security back to the seller at a specified future date or dates for a fixed price, if the existence of the put option prevents the transferor from accounting for the transaction as a sale, as described in paragraphs 860-20-55-20 through 55-23.
d. A seller-lessee’s residual value guarantee if that guarantee results in the seller-lessee deferring profit from the sale greater than or equal to the gross amount of the guarantee (see paragraphs 840-40-55-26 through 55-28). [Subparagraph superseded by ASC 842]
e. A sales incentive program in which a manufacturer contractually guarantees that the purchaser will receive a minimum resale amount at the time the equipment is disposed of, if that guarantee prevents the manufacturer from being able to account for a transaction as a sale of an asset, as described in paragraphs 840-10-55-12 through 55-25. (Because a manufacturer continues to recognize the residual value of the equipment it guaranteed [it is included in the seller-lessor’s net investment in the lease], if the sales incentive program qualified to be reported as a sales-type lease, it still would not be within the scope of this Topic because this Topic does not apply to a guarantee for which the underlying is related to an asset of the guarantor.) [Subparagraph superseded by ASC 606]
For more information on the application and effective dates of ASC 842 and ASC 606, see PwC’s guides on Leases and Revenue from contracts with customers, respectively.
2.4.3 Guarantees on a reporting entity’s own performance
Guarantees related to a reporting entity’s past performance are often within the scope of ASC 460. Guarantees related to a reporting entity’s future performance are not. For example, product warranties for goods are within the scope of ASC 460 because the warrantied product was produced and sold in the past. On the other hand, a warranty on the guarantor’s future services is excluded from the scope of ASC 460 because it relates to the guarantor’s own future performance. Warranties on future service include warranties on completion of a contract by a specified deadline, and service contracts that guarantee a customer a specified amount of cost savings in the future.
In some cases, a reporting entity may need to assess whether a guarantee relates to its own performance or the performance of another entity to determine whether the scope exception for a guarantee of its own future performance should be applied. If a reporting entity has guaranteed its own past performance, it should still assess whether it qualifies for other scope exceptions within ASC 460.
Example FG 2-3 illustrates a guarantee that is outside the scope of ASC 460 because it is a guarantee of a reporting entity's own future performance.
EXAMPLE FG 2-3
Indemnification of performance under a joint business arrangement
Indemnification of performance under a joint business arrangement
LCD Corp and FG Corp enter into a joint business arrangement. As part of the arrangement, LCD Corp and FG Corp agree to indemnify and "hold harmless" each other from any third-party claims relating to their performance under the arrangement. Accordingly, LCD Corp agrees to indemnify FG Corp for claims related to LCD Corp's performance under the joint business arrangement, and FG Corp agrees to indemnify LCD Corp for claims related to FG Corp's performance.
Are the indemnifications guarantees within the scope of ASC 460?
Analysis
No, neither the indemnification that LCD Corp provides to FG Corp nor the indemnification that FG Corp provides to LCD Corp are within the scope of ASC 460 because each indemnification is related to the indemnitor's own future performance under the joint business arrangement.
2.4.4 Credit derivatives
To determine whether a credit derivative is within the scope of ASC 460, a reporting entity should first determine whether the credit derivative contract should be accounted for as a derivative under the guidance in ASC 815. If the reporting entity is an insurance company, it must also consider the guidance in ASC 944. If a credit derivative is within the scope of ASC 815 or ASC 944, it should be accounted for using that guidance. If it is not within the scope of ASC 815 or ASC 944, it should be accounted for using the guidance in ASC 460.
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