This Subtopic addresses extinguishments of liabilities. This Subtopic does not address debt conversions or troubled debt restructurings. The accounting guidance for those areas is addressed in Subtopics
470-20 and
470-60.
An entity may settle a liability by transferring assets to the creditor or otherwise obtaining an unconditional release. Alternatively, an entity may enter into other arrangements designed to set aside assets dedicated to eventually settling a liability. Accounting for those arrangements has raised issues about when a liability should be considered extinguished. This Subtopic establishes standards for resolving those issues.
The guidance in this Subtopic applies to all entities.
The guidance in this Subtopic applies to extinguishments of all liabilities, including both financial and nonfinancial liabilities,
unless derecognition of a financial or nonfinancial liability is addressed in another Topic (for example, the derecognition guidance for gaming chips in Subtopic 924-405 on casinos or the breakage guidance in Topic 606 on revenue from contracts with customers). Derivative instruments that are nonfinancial liabilities (for example, a written commodity option) are included in the scope of this Subtopic. Unless addressed by other guidance (for example, paragraphs or paragraphs ), a debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if either of the following conditions is met: - a
The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes the following:
- 1
Delivery of cash
- 2
Delivery of other financial assets
- 3
Delivery of goods or services
- 4
Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds.
- b
The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. For purposes of applying this Subtopic, a sale and related assumption effectively accomplish a legal release if nonrecourse debt (such as certain mortgage loans) is assumed by a third party in conjunction with the sale of an asset that serves as sole collateral for that debt.
(P) December 16, 2027; (N) December 16, 2028
818-10-65-1Unless addressed by other guidance (for example, paragraphs or paragraphs ), a debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if either of the following conditions is met: - a
The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes the following:
- 1
Delivery of cash
- 2
Delivery of other financial assets
- 3
Delivery of goods or services
- 4
Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds
- 5
- b
The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. For purposes of applying this Subtopic, a sale and related assumption effectively accomplish a legal release if nonrecourse debt (such as certain mortgage loans) is assumed by a third party in conjunction with the sale of an asset that serves as sole collateral for that debt.
If a creditor releases a debtor from primary obligation on the condition that a third party assumes the obligation and that the original debtor becomes secondarily liable, that release extinguishes the original debtor's liability. However, in those circumstances, whether or not explicit consideration was paid for that guarantee, the original debtor becomes a guarantor. As a guarantor, it shall recognize a guarantee obligation in the same manner as would a guarantor that had never been primarily liable to that creditor, with due regard for the likelihood that the third party will carry out its obligations. The guarantee obligation shall be initially measured at fair value, and that amount reduces the gain or increases the loss recognized on extinguishment. See Topic
460 for accounting guidance related to guarantees.
See paragraph
470-50-50-1 for a disclosure requirement for debt considered to be extinguished by in-substance defeasance. In addition, see paragraph
860-30-50-1A for disclosure requirements for assets that are set aside solely for the purpose of satisfying scheduled payments of a specific obligation.
This Section provides implementation guidance related to the extinguishment of liabilities.
The following provides guidance on the application of the liability extinguishment criteria, specifically related to the following:
- a
In-substance defeasance transactions
- b
Transfers of noncash financial assets in settlement of a creditor's receivable
- c
- d
Extinguishment via legal defeasance.
In an in-substance defeasance transaction, a debtor transfers essentially risk-free assets to an irrevocable defeasance trust and the cash flows from those assets approximate the scheduled interest and principal payments of the debt being extinguished.
Paragraph superseded on 08/12/2020 after the end of the transition period stated in Accounting Standards Update No. 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products.