ASC

ASC 440-10

Overall

440 Commitments

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In brief

IntermediateDisclosureContingencies and guaranteesRecognitionLeases

ASC 440-10 is the general "Commitments" subtopic: it requires disclosure of certain contractual commitments (unused letters of credit, pledged assets, cumulative preferred dividends in arrears, plant acquisition commitments, obligations to reduce debt, maintain working capital, or restrict dividends) that are not otherwise more explicitly addressed elsewhere in the Codification. Its Unconditional Purchase Obligations Subsections require disclosure of off-balance-sheet take-or-pay and throughput contracts that are noncancelable, were negotiated as part of arranging financing for the supplier's facility, and have a remaining term over one year. The Topic is largely a disclosure standard—recognition of such obligations is governed by other Topics (842, 815, 330).

Key points (7)
  • The Topic applies to all entities and provides general commitments guidance, while commitment guidance specific to a Topic or industry resides in that Topic (440-10-05-3, 440-10-15-2).
  • Unconditional purchase obligations guidance excludes product financing arrangements within Section 470-40-15 and repurchase agreements within Topic 606 paragraphs 606-10-55-66 through 55-78 (440-10-15-4).
  • Sequence of analysis: apply Section 842-10-15 first to see if the obligation is a lease, then apply Sections 815-10-15 and 815-15-15 (and paragraph 815-10-55-60) to any non-lease or embedded-derivative portion (440-10-25-2 through 25-3); accrued net losses on firm inventory purchase commitments are recognized under 330-10-35-17 through 35-18 (440-10-25-4).
  • Regardless of more explicit disclosures elsewhere, entities must disclose unused letters of credit, leases, pledged/mortgaged assets, pension plans, cumulative preferred dividends in arrears, and commitments for plant acquisition, debt reduction, working capital maintenance, or dividend restrictions (440-10-50-1).
  • An unconditional purchase obligation triggers disclosure only if it is (a) noncancelable (or cancelable only on a remote contingency, with the other party's permission, on signing a replacement agreement, or on a penalty making continuation reasonably assured), (b) negotiated as part of arranging financing for the facilities providing the goods or services, and (c) has a remaining term exceeding one year (440-10-50-2).
  • For unrecognized obligations, disclose the nature and term, the fixed and determinable amount at the latest balance sheet date in aggregate and for each of the five succeeding fiscal years, the nature of variable components, and amounts purchased for each income statement period; omission is allowed only if the aggregate undisclosed commitment is immaterial (440-10-50-4).
  • If the obligation is recognized on the balance sheet, disclose the aggregate payments for each of the five years following the latest balance sheet date (440-10-50-6); disclosing imputed interest to reduce the obligation to present value is encouraged but not required, using the effective initial rate of the facility financing or, if unknown, the purchaser's incremental borrowing rate (440-10-50-5).

For students. This is primarily a disclosure Topic, not a recognition Topic—the classic error is assuming an unconditional purchase obligation must be booked as a liability; instead you test it under Topic 842 first, then Topic 815, and if neither applies you only disclose. Memorize the three-part disclosure trigger in 440-10-50-2, especially the often-overlooked requirement that the obligation was negotiated as part of arranging financing for the supplier's facility.

unconditional purchase obligationtake-or-pay contractthroughput contractunused letters of creditcumulative preferred dividends in arrearsfive-year payment schedulefirm purchase commitmentoff-balance-sheet financing

Machine-generated study aid for ASC 440-10. Check the source paragraphs below.

440-10-00Status

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440-10-00-1
The following table identifies the changes made to this Subtopic.
Paragraph Action Accounting Standards Update Date
Contract Added Accounting Standards Update No. 2016-02 02/25/2016
Lease Added Accounting Standards Update No. 2016-02 02/25/2016
Lease Payments Added Accounting Standards Update No. 2016-02 02/25/2016
Lessee Added Accounting Standards Update No. 2016-02 02/25/2016
Lessor Added Accounting Standards Update No. 2016-02 02/25/2016
Underlying Asset Added Accounting Standards Update No. 2016-02 02/25/2016
440-10-15-4 Amended Accounting Standards Update No. 2014-09 05/28/2014
440-10-25-1 Amended Accounting Standards Update No. 2016-02 02/25/2016
440-10-25-2 Amended Accounting Standards Update No. 2016-02 02/25/2016
440-10-50-1 Amended Accounting Standards Update No. 2023-06 10/09/2023
440-10-50-1 Amended Accounting Standards Update No. 2016-02 02/25/2016
440-10-50-3 Amended Accounting Standards Update No. 2016-02 02/25/2016
440-10-55-1 Amended Maintenance Update 2014-20 (PDF) 09/29/2014
440-10-60-4 Superseded Accounting Standards Update No. 2018-07 06/20/2018
440-10-60-5 Superseded Accounting Standards Update No. 2014-09 05/28/2014
440-10-60-12 Amended Accounting Standards Update No. 2016-02 02/25/2016
440-10-60-13 Amended Accounting Standards Update No. 2016-02 02/25/2016
440-10-60-16 Amended Accounting Standards Update No. 2014-09 05/28/2014
440-10-60-19 Superseded Accounting Standards Update No. 2014-09 05/28/2014
440-10-60-20 Superseded Accounting Standards Update No. 2014-09 05/28/2014

440-10-05Overview and Background

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440-10-05-1
The Commitments Topic establishes standards of financial accounting and reporting for certain commitments. This Topic contains only the Overall Subtopic. The guidance in this Subtopic is presented in the following two Subsections:
  1. a
    General
  2. b
    Unconditional Purchase Obligations.
440-10-05-2
The General Subsections provide guidance for unused letters of credit; preferred stock dividends in arrears; commitments such as those for plant acquisition; and obligations to reduce debts, maintain working capital, or restrict dividends.
440-10-05-3
This Topic provides general guidance for commitments, while other Topics include guidance for commitments that relate specifically to those Topics. In addition, commitments that are unique to a particular industry are discussed in the Topic for that industry, generally under the Commitments Subtopic.

Unconditional Purchase Obligations

440-10-05-4
The Unconditional Purchase Obligations Subsections provide guidance for unconditional purchase obligations, including take-or-pay and throughput contracts.

440-10-15Scope and Scope Exceptions

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Overall Guidance

440-10-15-1
The General Subsection of the Scope Section of the Overall Subtopic establishes the pervasive scope for the Commitments Topic, with specific exceptions noted in the other Subsections of this Section.

Entities

440-10-15-2
The guidance in the Commitments Topic applies to all entities.

Unconditional Purchase Obligations

Overall Guidance

440-10-15-3
The Unconditional Purchase Obligations Subsections apply to all entities and all unconditional purchase obligations.

Transactions

440-10-15-4
The guidance in the Unconditional Purchase Obligations Subsections does not apply to either of the following:
  1. a
    Product financing arrangements, that are within the scope of Section 470-40-15. See paragraph 470-40-05-5 for a discussion of the distinction between a product financing arrangement and an unconditional purchase obligation.
  2. b
    Repurchase agreements that are within the scope of Topic 606, specifically in paragraphs
    606-10-55-66 through 55-78
    .

440-10-25Recognition

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Unconditional Purchase Obligations

440-10-25-1
Depending on its terms, an unconditional purchase obligation can be subject to the guidance in Topic 842, to the guidance in Topic 815, or to neither.
440-10-25-2
The guidance in Section 842-10-15 shall be applied first to determine whether an unconditional purchase obligation is within the scope of Topic 842.
440-10-25-3
The guidance in Section 815-10-15 and paragraph 815-10-55-60 shall be applied to determine whether any portion of the arrangement that is not a lease is subject to Topic 815, and the guidance in Section 815-15-15 shall be applied to determine whether any lease portion of the arrangement contains an embedded derivative that is subject to the guidance in Subtopic 815-15.
440-10-25-4
Pursuant to paragraphs
330-10-35-17 through 35-18
, accrued net losses on firm purchase commitments for goods for inventory shall be recognized in the accounts.

440-10-50Disclosure

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440-10-50-1
Notwithstanding more explicit disclosures required elsewhere in this Codification, all of the following situations shall be disclosed in financial statements:
  1. a
    Unused letters of credit
  2. b
    Leases (see Section 842-20-50)
  3. c
    Assets pledged as security for loans
  4. d
    Pension plans (see Section 715-20-50)
  5. e
    The existence of cumulative preferred stock dividends in arrears
  6. f
    Commitments, including:
    1. 1
      A commitment for plant acquisition
    2. 2
      An obligation to reduce debts
    3. 3
      An obligation to maintain working capital
    4. 4
      An obligation to restrict dividends.
Transition date:(P) June 30, 2027; (N) June 30, 2027Transition guidance:
105-10-65-7 Notwithstanding more explicit disclosures required elsewhere in this Codification, all of the following situations shall be disclosed in financial statements:
  1. a
    Unused letters of credit
  2. b
    Leases (see Section 842-20-50)
  3. c
    Assets mortgaged, pledged , or otherwise subject to lien; the approximate amounts of those assets; and the related obligations collateralized
  4. d
    Pension plans (see Section 715-20-50)
  5. e
    The existence of cumulative preferred stock dividends in arrears
  6. f
    Commitments, including:
    1. 1
      A commitment for plant acquisition
    2. 2
      An obligation to reduce debts
    3. 3
      An obligation to maintain working capital
    4. 4
      An obligation to restrict dividends.

Unconditional Purchase Obligations

440-10-50-2
An unconditional purchase obligation that has all of the following characteristics shall be disclosed in accordance with paragraph 440-10-50-4 (if not recorded on the purchaser's balance sheet) or in accordance with paragraph 440-10-50-6 (if recorded on the purchaser's balance sheet):
  1. a
    It is noncancelable, or cancelable only in any of the following circumstances:
    1. 1
      Upon the occurrence of some remote contingency
    2. 2
      With the permission of the other party
    3. 3
      If a replacement agreement is signed between the same parties
    4. 4
      Upon payment of a penalty in an amount such that continuation of the agreement appears reasonably assured.
  2. b
    It was negotiated as part of arranging financing for the facilities that will provide the contracted goods or services or for costs related to those goods or services (for example, carrying costs for contracted goods). A purchaser is not required to investigate whether a supplier used an unconditional purchase obligation to help secure financing, if the purchaser would otherwise be unaware of that fact.
  3. c
    It has a remaining term in excess of one year
440-10-50-3
Future lease payments under leases that meet the conditions in paragraph 440-10-50-2 need not be disclosed in accordance with paragraph 440-10-50-4 or paragraph 440-10-50-6 if those future lease payments are disclosed in accordance with Section 842-20-50.

Unrecognized Commitments

440-10-50-4
A purchaser shall disclose unconditional purchase obligations that meet the criteria of paragraph 440-10-50-2 and that have not been recognized on its balance sheet. Disclosures of similar or related unconditional purchase obligations may be combined. The disclosures shall include all of the following:
  1. a
    The nature and term of the obligation(s)
  2. b
    The amount of the fixed and determinable portion of the obligation(s) as of the date of the latest balance sheet presented, in the aggregate and, if determinable, for each of the five succeeding fiscal years
  3. c
    The nature of any variable components of the obligation(s)
  4. d
    The amounts purchased under the obligation(s) (for example, the take-or-pay or throughput contract) for each period for which an income statement is presented.
The preceding disclosures may be omitted only if the aggregate commitment for all such obligations not disclosed is immaterial.
440-10-50-5
Disclosure of the amount of imputed interest necessary to reduce the unconditional purchase obligation(s) to present value is encouraged but not required. The discount rate shall be the effective initial interest rate of the borrowings that financed the facility (or facilities) that will provide the contracted goods or services, if known by the purchaser. If not, the discount rate shall be the purchaser's incremental borrowing rate at the date the obligation is entered into.

Recognized Commitments

440-10-50-6
A purchaser shall disclose for each of the five years following the date of the latest balance sheet presented the aggregate amount of payments for unconditional purchase obligations that meet the criteria of paragraph 440-10-50-2 and that have been recognized on the purchaser's balance sheet.
440-10-50-7
Paragraph 815-10-50-6 explains that, if an unconditional purchase obligation is subject to the requirements of both this Subtopic and Subtopic 815-10, the entity shall comply with the disclosure requirements of each Subtopic including paragraph 440-10-50-4.

440-10-55Implementation Guidance and Illustrations

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Unconditional Purchase Obligations

Illustrations

440-10-55-1
This Section, which is an integral part of the requirements of this Subtopic, provides general guidance to be used in the disclosure of unconditional purchase obligations.
440-10-55-2
This Example illustrates the guidance in paragraphs
440-10-50-4 through 50-5
.
440-10-55-3
Entity A has entered into a throughput contract with a manufacturing plant providing that Entity A will submit specified quantities of a chemical (representing a portion of plant capacity) for processing through the plant each period while the debt used to finance the plant remains outstanding. Entity A's processing charges are intended to be sufficient to cover a proportional share of fixed and variable operating expenses and debt service of the plant. If, however, the processing charges do not cover such operating expenses and debt service, Entity A must advance additional funds to cover a specified percentage of operating expenses and debt service. Such additional funds are considered advance payments for future throughput.
440-10-55-4
Entity A's unconditional obligation to pay a specified percentage of the plant's fixed operating expenses and debt service is fixed and determinable, while the amount of variable operating expenses that Entity A is obligated to pay will vary depending on plant operations and economic conditions.
440-10-55-5
Entity A's disclosure might be as follows.
  • To secure access to facilities to process chemical X, the entity has signed a processing agreement with a chemical supplier allowing the entity to submit 100,000 tons for processing annually for 20 years. Under the terms of the agreement, the entity may be required to advance funds against future processing charges if the chemical supplier is unable to meet its financial obligations. The aggregate amount of required payments at December 31, 19X1, is as follows (in thousands).
    • 19X2 " $10,000 " 19X3 " 10,000 " 19X4 " 9,000 " 19X5 " 8,000 " 19X6 " 8,000 " Later years " 100,000 " Total " 145,000 " Less: Amount representing interest " (45,000)" Total at present value " $100,000 "
  • In addition, the entity is required to pay a proportional share of the variable operating expenses of the plant. The entity's total processing charges under the agreement in each of the past 3 years have been $12 million.

440-10-60Relationships

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Receivables

440-10-60-1
For fees received for a commitment to originate or purchase a loan or group of loans, see Subtopic 310-20.

Inventory

440-10-60-2
For guidance on accrual of net losses on firm purchase commitments for goods for inventory, see paragraph 330-10-35-17.

Asset Retirement and Environmental Obligations

440-10-60-3
For postremediation monitoring commitments, see Subtopic 410-30.

Compensation—Retirement Benefits

440-10-60-6
For commitments related to pension plans, see Topic 715.

Other Expenses

440-10-60-7
For commitments to contribute, see Subtopic 720-25.

Research and Development

440-10-60-8
For royalty arrangements, purchase provisions, license agreements, and commitments to provide additional funding and other commitments under research and development arrangements, see Subtopic 730-20.

Derivatives and Hedging

440-10-60-9
For designating a derivative instrument as a hedge of the exposure to changes in the fair value of an unrecognized firm commitment, see Subtopic 815-25.
440-10-60-10
For loan commitments that relate to the origination of mortgage loans that will be held for sale, see paragraph 815-10-15-71.

Foreign Currency Matters

440-10-60-11
For foreign currency commitments, see paragraph 830-20-35-3.

Leases

440-10-60-12
For commitments under leases, see Topic 842
440-10-60-13
For nuclear fuel leases structured as take-or-pay contracts, see paragraph 842-10-55-1.

Transfers and Servicing

440-10-60-14
For assets pledged as collateral for secured borrowings, see Subtopic 860-30.

Financial Services—Mortgage Banking

440-10-60-15
For fair value of committed and uncommitted mortgage loans and mortgage-backed securities, see Section 948-310-35.
440-10-60-16
For recognition of loan and commitment fees, see paragraph 948-310-35-7.
440-10-60-17
For commitment fees relating to loans held for sale (residential or commercial loan commitment fees), see paragraph 948-720-25-1.

Health Care Entities

440-10-60-18
For prepaid health care services contracts, see paragraph 954-450-25-4.

Related subtopics