# ASC 405-20: Liabilities — Extinguishments of Liabilities Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/405/20/) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T00:13:46.142Z to 2026-09-10T00:14:11.157Z Record version: sha256:68d4c8b3d328191691a82bd28ea1c5137c28f4f7cc45f5a0e94ffc7d6e0a5cfb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 405-20: Liabilities — Extinguishments of Liabilities ### Machine-generated study aids ```json { "summary": "ASC 405-20 governs when a debtor may derecognize a liability because it has been extinguished. Under 405-20-40-1, extinguishment occurs if and only if the debtor pays the creditor (cash, other financial assets, goods or services, or reacquisition of its own debt securities) and is relieved of the obligation, or the debtor is legally released as primary obligor judicially or by the creditor. The Subtopic also contains special derecognition (breakage) rules for liabilities from prepaid stored-value products and excludes debt conversions and troubled debt restructurings (see 470-20 and 470-60).", "key_points": [ "A debtor shall derecognize a liability if and only if it has been extinguished, meaning either payment with relief of the obligation or legal release as primary obligor (405-20-40-1); a sale plus assumption of nonrecourse debt by a third party in conjunction with sale of the sole collateral asset effectively accomplishes a legal release.", "The Subtopic applies to all entities and to extinguishments of all financial and nonfinancial liabilities (including derivative nonfinancial liabilities such as a written commodity option) unless derecognition is addressed elsewhere, such as 924-405 gaming chips or Topic 606 breakage (405-20-15-1 through 15-2).", "If a creditor releases the debtor conditioned on a third party assuming the obligation with the original debtor secondarily liable, the original liability is extinguished but the debtor recognizes a guarantee obligation at fair value, which reduces the gain or increases the loss on extinguishment (405-20-40-2; see Topic 460).", "In-substance defeasance does not extinguish the liability because the debtor is not released, the lender is not limited to the trust assets, and the debtor retains control of the trust assets' benefits (405-20-55-3 through 55-4); a legal defeasance can extinguish the liability if 405-20-40-1(b) is met, which is a matter of law (405-20-55-9).", "For prepaid stored-value products in scope, expected breakage is derecognized in proportion to the pattern of rights expected to be exercised, only to the extent a significant reversal is probable of not occurring; if no breakage is expected, derecognize when the likelihood of exercise becomes remote (405-20-40-4), with estimate updates treated as changes in accounting estimate under 250-10-45-17 through 45-20.", "The breakage guidance does not apply to products whose breakage must be remitted under unclaimed property laws, products attached to a segregated bank account, customer loyalty programs, or transactions within other Topics such as 606 (405-20-40-3).", "Entities recognizing breakage must disclose the methodology used and significant judgments made in applying it (405-20-50-2); see also 470-50-50-1 for in-substance defeasance disclosure and 860-30-50-1A for assets set aside to satisfy a specific obligation." ], "categories": [ "Derecognition", "Financial instruments", "Debt and equity", "Disclosure" ], "audience_level": "intermediate", "student_note": "The classic trap is thinking that setting aside dedicated assets (in-substance defeasance) removes the debt from the balance sheet — it does not; only payment with relief or a legal release works. Also remember that a released debtor who becomes secondarily liable must book a fair value guarantee liability that reduces the extinguishment gain.", "related_topics": [ "470-20", "470-60", "470-50", "860-10", "460", "606" ], "key_concepts": [ "extinguishment of liabilities", "derecognition", "legal release from primary obligor", "in-substance defeasance", "legal defeasance", "prepaid stored-value products", "breakage", "guarantee obligation" ] } ``` Source downloaded (UTC): 2026-09-10T00:13:46.142Z to 2026-09-10T00:13:46.142Z Record version: sha256:dbe1690d361445d6362bdf37b4074ee8aaa1cdf6aac1d47f5d47a4368cb4679f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 405-20-00: 00 Status [Read section](https://asc.understandingaccounting.org/asc/405/20/#00-status) SEC content: no ##### [405-20-00-1](https://asc.understandingaccounting.org/asc/405/20/#405-20-00-1) Pending content: no Source downloaded (UTC): 2026-09-10T00:13:46.142Z to 2026-09-10T00:13:46.142Z Record version: sha256:45b73ae06e6f57a6c4815df0458aabcb8867769dcd760c2495c3a0829a2bbc0b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
Environmental CreditAddedAccounting Standards Update No. 2026-0205/19/2026
Environmental Credit ObligationAddedAccounting Standards Update No. 2026-0205/19/2026
ExchangeAddedAccounting Standards Update No. 2026-0205/19/2026
Financial AssetAddedAccounting Standards Update No. 2026-0205/19/2026
Income TaxesAddedAccounting Standards Update No. 2026-0205/19/2026
Nonfinancial AssetAddedAccounting Standards Update No. 2026-0205/19/2026
Nonreciprocal Transfer (1st def.)AddedAccounting Standards Update No. 2026-0205/19/2026
405-20-10-1SupersededAccounting Standards Update No. 2009-1612/23/2009
405-20-15-2AmendedAccounting Standards Update No. 2016-0403/08/2016
405-20-40-1AmendedAccounting Standards Update No. 2026-0205/19/2026
405-20-40-1AmendedAccounting Standards Update No. 2016-0403/08/2016
405-20-40-3AddedAccounting Standards Update No. 2016-0403/08/2016
405-20-40-4AddedAccounting Standards Update No. 2016-0403/08/2016
405-20-50-1AmendedAccounting Standards Update No. 2009-1612/23/2009
405-20-50-2AddedAccounting Standards Update No. 2016-0403/08/2016
405-20-55-2AmendedAccounting Standards Update No. 2012-0410/01/2012
405-20-55-4AmendedAccounting Standards Update No. 2015-1006/12/2015
405-20-55-4AmendedAccounting Standards Update No. 2012-0410/01/2012
405-20-55-6 through 55-8SupersededAccounting Standards Update No. 2009-1612/23/2009
405-20-65-1AddedAccounting Standards Update No. 2016-0403/08/2016
Source downloaded (UTC): 2026-09-10T00:13:49.419Z to 2026-09-10T00:13:49.419Z Record version: sha256:7c6339656ddb86a4e8928326922bf2249f4072cc40df68764ed4c81575bc847e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 405-20-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/405/20/#05-overview-and-background) SEC content: no ##### [405-20-05-1](https://asc.understandingaccounting.org/asc/405/20/#405-20-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T00:13:49.419Z to 2026-09-10T00:13:49.419Z Record version: sha256:911eec93d65f0d4ba538756617fde537656aa29333fb8e10d5047a21eac8ba29 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. ##### [405-20-05-2](https://asc.understandingaccounting.org/asc/405/20/#405-20-05-2) Pending content: no Source downloaded (UTC): 2026-09-10T00:13:49.419Z to 2026-09-10T00:13:49.419Z Record version: sha256:b7aa508549b769af1a65f0fe01353b69659d0c287c98d40ab1a74dbea160407e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. Source downloaded (UTC): 2026-09-10T00:13:53.385Z to 2026-09-10T00:13:53.385Z Record version: sha256:8dda5d2677303335ac11132da90d356069b5abb3aa8961afae1b5ea399695838 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 405-20-10: 10 Objectives [Read section](https://asc.understandingaccounting.org/asc/405/20/#10-objectives) SEC content: no ##### [405-20-10-1](https://asc.understandingaccounting.org/asc/405/20/#405-20-10-1) Pending content: no Source downloaded (UTC): 2026-09-10T00:13:53.385Z to 2026-09-10T00:13:53.385Z Record version: sha256:37f7cf4a748a105830e80caeaf9812e314a6b4ed533798bede99c850f090dd8b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2009-16](https://asc.understandingaccounting.org/updates/asu-2009-16/). Source downloaded (UTC): 2026-09-10T00:13:55.493Z to 2026-09-10T00:13:55.493Z Record version: sha256:eb5e079e87133f032739db6575b4658dc95330799eae76747e76acf3a953438c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 405-20-15: 15 Scope and Scope Exceptions [Read section](https://asc.understandingaccounting.org/asc/405/20/#15-scope-and-scope-exceptions) SEC content: no #### Entities ##### [405-20-15-1](https://asc.understandingaccounting.org/asc/405/20/#405-20-15-1) Pending content: no Source downloaded (UTC): 2026-09-10T00:13:55.493Z to 2026-09-10T00:13:55.493Z Record version: sha256:8f64d0ad7a418993be76b9e75bbb912925b65e00746547ff54c5e657a328c676 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in this Subtopic applies to all entities. #### Transactions ##### [405-20-15-2](https://asc.understandingaccounting.org/asc/405/20/#405-20-15-2) Pending content: no Source downloaded (UTC): 2026-09-10T00:13:55.493Z to 2026-09-10T00:13:55.493Z Record version: sha256:ddbb66d81b7824dad3af47f26d531b1a5073980f2d4588ef0bf832dd134fa673 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. Source downloaded (UTC): 2026-09-10T00:14:00.411Z to 2026-09-10T00:14:00.411Z Record version: sha256:435b87ffdac70b126a000c2873d20f2b54103f089f0e06a9165e4316e07fd208 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 405-20-40: 40 Derecognition [Read section](https://asc.understandingaccounting.org/asc/405/20/#40-derecognition) SEC content: no ##### [405-20-40-1](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-1) Pending content: yes Source downloaded (UTC): 2026-09-10T00:14:00.411Z to 2026-09-10T00:14:00.411Z Record version: sha256:22adfa6fd0ccbd30c5332e75963dcb8842d6abf4f020f80a1f23c8993449081e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Unless addressed by other guidance (for example, paragraphs [405-20-40-3 through 40-4](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-3) or paragraphs [606-10-55-46 through 55-49](https://asc.understandingaccounting.org/asc/606/10/#606-10-55-46) ), 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: 1. a The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes the following: 1. 1 Delivery of cash 2. 2 Delivery of other financial assets 3. 3 Delivery of goods or services 4. 4 Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds. 2. 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. Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance: [818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)Unless addressed by other guidance (for example, paragraphs [405-20-40-3 through 40-4](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-3) or paragraphs [606-10-55-46 through 55-49](https://asc.understandingaccounting.org/asc/606/10/#606-10-55-46) ), 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: 1. a The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes the following: 1. 1 Delivery of cash 2. 2 Delivery of other financial assets 3. 3 Delivery of goods or services 4. 4 Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds 5. 5 Delivery of [environmental credits](https://asc.understandingaccounting.org/glossary/e/#environmental-credit "(P) December 16, 2027; (N) December 16, 2028818-10-65-1An enforceable right that is acquired, internally generated, granted by a regulatory agency or its designee(s), or received in a nonreciprocal transfer that is not a grant from a regulator or its designee(s) that meets all of the following criteria:Lacks physical substance and is not a financial asset.Is represented to prevent, control, reduce, or remove emissions or other pollution.Is, or previously was, separately transferable in an exchange transaction. If an item is no longer separately transferable in an exchange transaction, an entity must be able to use that item to satisfy an environmental credit obligation to meet this criterion.Is not an income tax credit that may be used to settle an entity’s income tax liability, regardless of whether the entity has a tax liability or intends to use the credit for that purpose.An environmental credit that meets the above criteria may exist in a variety of forms, including (but not limited to) credits, certificates, allowances, and offsets."). 2. 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. ##### [405-20-40-2](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-2) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:00.411Z to 2026-09-10T00:14:00.411Z Record version: sha256:c6ee59aef484d22a891cc5cad915107c1c180392417f5322c61e5c7d4687b727 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. #### Prepaid Stored-Value Products ##### [405-20-40-3](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-3) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:00.411Z to 2026-09-10T00:14:00.411Z Record version: sha256:c23b8d69b3938c3116478cc5eeaf408381fe574a2c12cd1467ebc90408fe2857 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Prepaid stored-value products are products in physical and digital forms with stored monetary values that are issued for the purpose of being commonly accepted as payment for goods or services. While the holder of a prepaid stored-value product also may be permitted to redeem the product for cash, prepaid stored-value products do not include products that only can be redeemed by the product holder for cash (for example, nonrecourse debt, bearer bonds, or trade payables). Examples of prepaid stored-value products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and traveler's checks. The derecognition guidance in paragraph [405-20-40-4](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-4) does not apply to liabilities related to either of the following: 1. a Prepaid stored-value products (or portions of those products) for which any breakage (that is, the portion of the dollar value of prepaid stored-value products that ultimately is not redeemed by product holders for cash or not used to purchase goods and/or services) must be remitted in accordance with unclaimed property laws 2. b Prepaid stored-value products that are attached to a segregated bank account like a customer depository account. The guidance also does not apply to customer loyalty programs or transactions within the scope of other Topics (for example, Topic 606 on revenue from contracts with customers). ##### [405-20-40-4](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-4) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:00.411Z to 2026-09-10T00:14:00.411Z Record version: sha256:c464eef404add3306aef69e064b3d369c0eaaa2e163152dfda37c42af3b38a74 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product in the scope of paragraph [405-20-40-3](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-3), the entity shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount for prepaid stored-value products in the scope of paragraph [405-20-40-3](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-3), the entity shall derecognize the amount related to breakage when the likelihood of the product holder exercising its remaining rights becomes remote. At the end of each period, an entity shall update the estimated breakage amount to represent faithfully the circumstances present at the end of the period and the changes in circumstances during the period. Changes to an entity's estimated breakage amount shall be accounted for as a change in accounting estimate in accordance with paragraphs [250-10-45-17 through 45-20](https://asc.understandingaccounting.org/asc/250/10/#250-10-45-17) . Source downloaded (UTC): 2026-09-10T00:14:02.153Z to 2026-09-10T00:14:02.153Z Record version: sha256:5d7d35a061dc7d1052f04654bfd8726b7aace1d123fc9517cb9321269f98a247 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 405-20-50: 50 Disclosure [Read section](https://asc.understandingaccounting.org/asc/405/20/#50-disclosure) SEC content: no ##### [405-20-50-1](https://asc.understandingaccounting.org/asc/405/20/#405-20-50-1) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:02.153Z to 2026-09-10T00:14:02.153Z Record version: sha256:e763fd36172ab78893410f231faaea5b8f4ce472c30ce4b88caf0ba1c7e63792 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. See paragraph [470-50-50-1](https://asc.understandingaccounting.org/asc/470/50/#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](https://asc.understandingaccounting.org/asc/860/30/#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. #### Prepaid Stored-Value Products ##### [405-20-50-2](https://asc.understandingaccounting.org/asc/405/20/#405-20-50-2) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:02.153Z to 2026-09-10T00:14:02.153Z Record version: sha256:33295625fa120095885fa814004e6b79e5dd4ffbe6dda3564e37e6a868732daa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity that recognizes a breakage amount in accordance with paragraph [405-20-40-4](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-4) shall disclose the methodology used to recognize breakage and significant judgments made in applying the breakage methodology. Source downloaded (UTC): 2026-09-10T00:14:05.784Z to 2026-09-10T00:14:05.784Z Record version: sha256:c97cfe4c446673c744a927b65812864950471527e70941e5e65ee3b362cf9a35 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 405-20-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/405/20/#55-implementation-guidance-and-illustrations) SEC content: no #### Implementation Guidance ##### [405-20-55-1](https://asc.understandingaccounting.org/asc/405/20/#405-20-55-1) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:05.784Z to 2026-09-10T00:14:05.784Z Record version: sha256:4d872f65d2e7a95778068b7eac775791aa50fffbca68fa55c8d415aefcb8daeb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Section provides implementation guidance related to the extinguishment of liabilities. ##### [405-20-55-2](https://asc.understandingaccounting.org/asc/405/20/#405-20-55-2) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:05.784Z to 2026-09-10T00:14:05.784Z Record version: sha256:7575356a42b7e8c3128a3cb8725aaac68815207356116254b11b2bd955faa586 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following provides guidance on the application of the liability extinguishment criteria, specifically related to the following: 1. a In-substance defeasance transactions 2. b Transfers of noncash financial assets in settlement of a creditor's receivable 3. c [Subparagraph superseded by Accounting Standards Update No. 2012-04](https://asc.understandingaccounting.org/updates/asu-2012-04/). 4. d Extinguishment via legal defeasance. ##### [405-20-55-3](https://asc.understandingaccounting.org/asc/405/20/#405-20-55-3) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:05.784Z to 2026-09-10T00:14:05.784Z Record version: sha256:6199d24cf169987fbfb760e0d239b39337f4f54d6e8045797e54a19a1f68a74e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. ##### [405-20-55-4](https://asc.understandingaccounting.org/asc/405/20/#405-20-55-4) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:05.784Z to 2026-09-10T00:14:05.784Z Record version: sha256:190be3c7c63c240437e4d74f96b50e081f0300552439d0ab7833cabc1771b961 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An in-substance defeasance transaction does not meet the derecognition criteria in either Section 405-20-40 for the liability or in Section 860-10-40 for the asset. The transaction does not meet the criteria because of the following: 1. a The debtor is not released from the debt by putting assets in the trust; if the assets in the trust prove insufficient, for example, because a default by the debtor accelerates its debt, the debtor must make up the difference. 2. b The lender is not limited to the cash flows from the assets in trust. 3. c The lender does not have the ability to dispose of the assets at will or to terminate the trust. 4. d If the assets in the trust exceed what is necessary to meet scheduled principal and interest payments, the transferor can remove the assets. 5. e [Subparagraph superseded by Accounting Standards Update No. 2012-04](https://asc.understandingaccounting.org/updates/asu-2012-04/). 6. f The debtor does not surrender control of the benefits of the assets because those assets are still being used for the debtor's benefit, to extinguish its debt, and because no asset can be an asset of more than one entity, those benefits must still be the debtor's assets. ##### [405-20-55-5](https://asc.understandingaccounting.org/asc/405/20/#405-20-55-5) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:05.784Z to 2026-09-10T00:14:05.784Z Record version: sha256:230e71b1f139e4061d245c17862122042d439961b71857cb51ced34650f61cc8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A cash payment or conveyance of noncash financial assets from a debtor to a creditor results in full or partial settlement of the creditor's receivable from the debtor. Whether or not that settlement is an extinguishment is governed by paragraph [405-20-40-1](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-1). However, if a noncash financial asset was conveyed to the creditor in full or partial settlement of a creditor's receivable, it would be rare to conclude that debt has been extinguished if the criteria of paragraph [860-10-40-5](https://asc.understandingaccounting.org/asc/860/10/#860-10-40-5) were not also met. ##### [405-20-55-6](https://asc.understandingaccounting.org/asc/405/20/#405-20-55-6) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:05.784Z to 2026-09-10T00:14:05.784Z Record version: sha256:98a3c525cadcb24cb1c30b27d2f591822aac96fb7e66a3bb318a80f2c2a2f831 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraphs 405-20-55-6 through 55-8 superseded by Accounting Standards Update No. 2009-16](https://asc.understandingaccounting.org/asc/405/20/#405-20-55-6). ##### [405-20-55-9](https://asc.understandingaccounting.org/asc/405/20/#405-20-55-9) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:05.784Z to 2026-09-10T00:14:05.784Z Record version: sha256:6ee0556ad3276c60630ebad5097b24972930b648337f0747e64c90c159cba6fa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In a legal defeasance, generally the creditor legally releases the debtor from being the primary obligor under the liability. Liabilities are extinguished by legal defeasances if the condition in paragraph [405-20-40-1(b)](https://asc.understandingaccounting.org/asc/405/20/#405-20-40-1) is satisfied. Whether the debtor has in fact been released and the condition in that paragraph has been met is a matter of law. Conversely, in an in-substance defeasance, the debtor is not released from the debt by putting assets in the trust. For the reasons identified in paragraph [405-20-55-4](https://asc.understandingaccounting.org/asc/405/20/#405-20-55-4), an in-substance defeasance is different from a legal defeasance and the liability is not extinguished. Source downloaded (UTC): 2026-09-10T00:14:08.518Z to 2026-09-10T00:14:08.518Z Record version: sha256:51b47c5bdd2917f593c7481e8ec070d2d180918f87600d19ef52ac49730740c3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 405-20-65: 65 Transition and Open Effective Date Information [Read section](https://asc.understandingaccounting.org/asc/405/20/#65-transition-and-open-effective-date-information) SEC content: no ##### [405-20-65-1](https://asc.understandingaccounting.org/asc/405/20/#405-20-65-1) Pending content: no Source downloaded (UTC): 2026-09-10T00:14:08.518Z to 2026-09-10T00:14:08.518Z Record version: sha256:982478f6f51f48e76594a86dfb4294a8ac4df8fbe96df791a0069efb30f6e75f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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._