The Guarantees Topic establishes the accounting and disclosure requirements to be met by a guarantor for certain guarantees issued and outstanding. This Topic contains only the Overall Subtopic. The guidance in this Subtopic is presented in the following two Subsections:
- a
General
- b
The General Subsections address the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee, and require certain disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees.
Additional guidance about certain guarantees, such as put options, is provided in other Topics. Section
460-10-60 provides links to those other Topics. Guarantees that are unique to a particular industry are discussed in the Topic for that industry.
The Product Warranties Subsections address accounting for product
warranties.
The General Subsection of this Section establishes the pervasive scope for the Guarantees Topic, with specific exceptions noted in the other Subsections of this Section.
The guidance in the Guarantees Topic applies to all entities.
The transactions guidance for the scope of the Guarantees Topic is organized as follows:
- a
Transactions that are within the scope of this Topic
- b
Transactions that are excluded from the scope of this Topic.
For guarantees of debt, it does not matter whether the guaranteed party is the creditor or the debtor, that is, whether the guarantor is required to pay the creditor or the debtor (who would then have the funds to pay its debt to the creditor). The underlying (that is, the debtor's failure to make scheduled payments or the occurrence of other events of default) could be related to either the creditor's receivable or the debtor's liability.
The Product Warranties Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Section, see paragraph
460-10-15-1, with specific transaction exceptions noted below.
The guidance in the Product Warranties Subsections applies only to product
warranties, which include all of the following:
- a
Product warranties issued by the guarantor, regardless of whether the guarantor is required to make payment in services or cash
- b
Separately priced extended warranty or product maintenance contracts and warranties that provide a customer with a service in addition to the assurance that the product complies with agreed-upon specifications (see paragraphs for guidance on determining whether a warranty provides a customer with a service in addition to the assurance that the product complies with agreed-upon specifications) - c
Warranty obligations that are incurred in connection with the sale of the product, that is, obligations in which the customer does not have the option to purchase the warranty separately and that do not provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications.
The guidance in the General Subsections of Sections 460-10-25 and 460-10-30 does not apply to guarantee contracts within the scope of the Product Warranties Subsections. Those guarantee contracts are subject, however, to the requirements in the
General Subsection of Section 460-10-50.
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: - a
- b
Obligations of commercial banks under standby letters of credit
- c
Guarantees to repurchase receivables (or, in some cases, to repurchase the related property) that have been sold or otherwise assigned
- d
Other agreements that in substance have the same guarantee characteristic.
(P) December 16, 2027; (N) December 16, 2028
270-10-65-1For interim and annual reporting periods, 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: - a
- b
Obligations of commercial banks under standby letters of credit
- c
Guarantees to repurchase receivables (or, in some cases, to repurchase the related property) that have been sold or otherwise assigned
- d
Other agreements that in substance have the same guarantee characteristic.
The disclosure shall include the nature and amount of the guarantee. Consideration should be given to disclosing, if estimable, the value of any recovery that could be expected to result, such as from the guarantor's right to proceed against an outside party.
(P) December 16, 2027; (N) December 16, 2028
270-10-65-1For interim and annual reporting periods, the disclosure shall include the nature and amount of the guarantee. Consideration should be given to disclosing, if estimable, the value of any recovery that could be expected to result, such as from the guarantor's right to proceed against an outside party. A guarantor shall disclose all of the following information about each guarantee, or each group of similar guarantees, even if the likelihood of the guarantor's having to make any payments under the guarantee is remote: - a
The nature of the guarantee, including all of the following:
- 1
The approximate term of the guarantee
- 2
How the guarantee arose
- 3
The events or circumstances that would require the guarantor to perform under the guarantee
- 4
The current status (that is, as of the date of the statement of financial position) of the payment/performance risk of the guarantee (for example, the current status of the payment/performance risk of a credit-risk-related guarantee could be based on either recently issued external credit ratings or current internal groupings used by the guarantor to manage its risk)
- 5
If the entity uses internal groupings for purposes of item (a)(4), how those groupings are determined and used for managing risk.
- b
All of the following information about the maximum potential amount of future payments under the guarantee:
- 1
The maximum potential amount of future payments (undiscounted) that the guarantor could be required to make under the guarantee, which shall not be reduced by the effect of any amounts that may possibly be recovered under recourse or collateralization provisions in the guarantee (which are addressed under (d) and (e))
- 2
If the terms of the guarantee provide for no limitation to the maximum potential future payments under the guarantee, that fact
- 3
If the guarantor is unable to develop an estimate of the maximum potential amount of future payments under its guarantee, the reasons why it cannot estimate the maximum potential amount.
- c
The current carrying amount of the liability, if any, for the guarantor's obligations under the guarantee (including the amount, if any, recognized under Section 450-20-30 or Subtopic 326-20 on financial instruments measured at amortized cost), regardless of whether the guarantee is freestanding or embedded in another contract - d
The nature of any recourse provisions that would enable the guarantor to recover from third parties any of the amounts paid under the guarantee
- e
The nature of any assets held either as collateral or by third parties that, upon the occurrence of any triggering event or condition under the guarantee, the guarantor can obtain and liquidate to recover all or a portion of the amounts paid under the guarantee
- f
If estimable, the approximate extent to which the proceeds from liquidation of assets held either as collateral or by third parties would be expected to cover the maximum potential amount of future payments under the guarantee.
See the Product Warranties Subsection of Section 460-10-50 for an exception to the requirements of (b). (P) December 16, 2027; (N) December 16, 2028
270-10-65-1For interim and annual reporting periods, a guarantor shall disclose all of the following information about each guarantee, or each group of similar guarantees, even if the likelihood of the guarantor's having to make any payments under the guarantee is remote: - a
The nature of the guarantee, including all of the following:
- 1
The approximate term of the guarantee
- 2
How the guarantee arose
- 3
The events or circumstances that would require the guarantor to perform under the guarantee
- 4
The current status (that is, as of the date of the statement of financial position) of the payment/performance risk of the guarantee (for example, the current status of the payment/performance risk of a credit-risk-related guarantee could be based on either recently issued external credit ratings or current internal groupings used by the guarantor to manage its risk)
- 5
If the entity uses internal groupings for purposes of item (a)(4), how those groupings are determined and used for managing risk.
- b
All of the following information about the maximum potential amount of future payments under the guarantee:
- 1
The maximum potential amount of future payments (undiscounted) that the guarantor could be required to make under the guarantee, which shall not be reduced by the effect of any amounts that may possibly be recovered under recourse or collateralization provisions in the guarantee (which are addressed under (d) and (e))
- 2
If the terms of the guarantee provide for no limitation to the maximum potential future payments under the guarantee, that fact
- 3
If the guarantor is unable to develop an estimate of the maximum potential amount of future payments under its guarantee, the reasons why it cannot estimate the maximum potential amount.
- c
The current carrying amount of the liability, if any, for the guarantor's obligations under the guarantee (including the amount, if any, recognized under Section 450-20-30 or Subtopic 326-20 on financial instruments measured at amortized cost), regardless of whether the guarantee is freestanding or embedded in another contract - d
The nature of any recourse provisions that would enable the guarantor to recover from third parties any of the amounts paid under the guarantee
- e
The nature of any assets held either as collateral or by third parties that, upon the occurrence of any triggering event or condition under the guarantee, the guarantor can obtain and liquidate to recover all or a portion of the amounts paid under the guarantee
- f
If estimable, the approximate extent to which the proceeds from liquidation of assets held either as collateral or by third parties would be expected to cover the maximum potential amount of future payments under the guarantee.
See the Product Warranties Subsection of Section 460-10-50 for an exception to the requirements of (b). A guarantor shall disclose all of the following information for product warranties and other guarantee contracts described in paragraph 460-10-15-9: - a
The information required to be disclosed by paragraph 460-10-50-4 except that a guarantor is not required to disclose the maximum potential amount of future payments specified in paragraph 460-10-50-4(b) - b
The guarantor's accounting policy and methodology used in determining its liability for product warranties
- c
A tabular reconciliation of the changes in the guarantor's aggregate product warranty liability for the reporting period. That reconciliation shall include all of the following amounts:
- 1
The beginning balance of the aggregate product warranty liability
- 2
The aggregate reductions in that liability for payments made (in cash or in kind) under the warranty
- 3
The aggregate changes in the liability for accruals related to product warranties issued during the reporting period
- 4
The aggregate changes in the liability for accruals related to preexisting warranties (including adjustments related to changes in estimates)
- 5
The ending balance of the aggregate product warranty liability.
(P) December 16, 2026; (N) December 16, 2026
220-40-65-1A guarantor shall disclose all of the following information for product warranties and other guarantee contracts described in paragraph 460-10-15-9: - a
The information required to be disclosed by paragraph 460-10-50-4 except that a guarantor is not required to disclose the maximum potential amount of future payments specified in paragraph 460-10-50-4(b) - b
The guarantor's accounting policy and methodology used in determining its liability for product warranties
- c
A tabular reconciliation of the changes in the guarantor's aggregate product warranty liability for the reporting period. That reconciliation shall include all of the following amounts:
- 1
The beginning balance of the aggregate product warranty liability
- 2
The aggregate reductions in that liability for payments made (in cash or in kind) under the warranty
- 3
The aggregate changes in the liability for accruals related to product warranties issued during the reporting period
- 4
The aggregate changes in the liability for accruals related to preexisting warranties (including adjustments related to changes in estimates)
- 5
The ending balance of the aggregate product warranty liability.
See paragraphs for additional disclosure requirements. (P) December 16, 2027; (N) December 16, 2028
270-10-65-1For interim and annual reporting periods, a guarantor shall disclose all of the following information for product warranties and other guarantee contracts described in paragraph 460-10-15-9: - a
The information required to be disclosed by paragraph 460-10-50-4 except that a guarantor is not required to disclose the maximum potential amount of future payments specified in paragraph 460-10-50-4(b) - b
The guarantor's accounting policy and methodology used in determining its liability for product warranties
- c
A tabular reconciliation of the changes in the guarantor's aggregate product warranty liability for the reporting period. That reconciliation shall include all of the following amounts:
- 1
The beginning balance of the aggregate product warranty liability
- 2
The aggregate reductions in that liability for payments made (in cash or in kind) under the warranty
- 3
The aggregate changes in the liability for accruals related to product warranties issued during the reporting period
- 4
The aggregate changes in the liability for accruals related to preexisting warranties (including adjustments related to changes in estimates)
- 5
The ending balance of the aggregate product warranty liability.
See paragraphs for additional disclosure requirements. The implementation guidance for guarantees within the scope of this Topic is organized as follows:
- a
Financial guarantees, which contains scope guidance for paragraph
460-10-15-4(a) - b
Performance guarantees, which contains scope guidance for paragraph
460-10-15-4(b) - c
Indemnifications, which contains scope guidance for paragraph
460-10-15-4(c) - d
The lists that follow are not intended to be all-inclusive. A put option is a market value guarantee because it gives the holder the right to sell a specified quantity of an asset related to the
underlying to the writer of the option at a specified price (strike price) up to the expiration date.
For example, paragraphs address the interaction of various Subtopics (including this Subtopic) in accounting for transactions that involve sale of a marketable security to a third-party buyer, with the buyer's having an option to put the security back to the seller at a specified future date or dates for a fixed price. The following are examples of contracts of the type described in paragraph
460-10-15-4(b):
- a
- b
Bid bonds
- c
Performance bonds
- d
Other contracts that are similar to performance standby letters of credit.
The following are examples of contracts of the type described in paragraph
460-10-15-4(c):
- a
An indemnification agreement (contract) that contingently requires the indemnifying party (guarantor) to make payments to the indemnified party (guaranteed party) based on an adverse judgment in a lawsuit or the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law.
- b
A lessee's indemnification of the lessor for any adverse tax consequences that may arise from a change in the tax laws, because only a legislative body can change the tax laws, and the lessee therefore has no control over whether payments will be required under that indemnification. In contrast, as discussed in paragraph 460-10-55-18(a), when a lessee indemnifies a lessor against adverse tax consequences that may arise from acts, omissions, and misrepresentations of the lessee, that indemnification is outside the scope of this Topic because the lessee is, in effect, guaranteeing its own future performance. - c
A seller's indemnification against additional income taxes due for years before a business combination, because the indemnification relates to the seller-guarantor's past performance, not its future performance.
The following is an example of a contract of the type described in paragraph
460-10-15-4(d).
The following are examples of contracts that are outside the scope of this Topic because they are not of any of the types described in paragraph
460-10-15-4:
- a
Commercial letters of credit and other loan commitments, which are commonly thought of as guarantees of funding, are not included in the scope of this Topic because those instruments do not guarantee payment of a money obligation and do not provide for payment in the event of default by the account party. - b
A noncontingent forward contract for which net settlement could involve a net settlement payment from either party is not included in the scope of this Topic. However, as discussed in paragraph 460-10-55-9, a contingent forward contract may meet one of the characteristics in paragraph 460-10-15-4 and be included in the scope of this Topic. - c
A guarantee provision in a financial instrument that is commonly thought of as a market value guarantee of the other terms of that same financial instrument is not within the scope of this Topic unless that guarantee provision is accounted for separately as a derivative under Topic 815 (see paragraph 460-10-25-1(a)). For example, a put option that is embedded in a puttable bond (but is not accounted for separately as a derivative) could be viewed by the investor (the guaranteed party) as a guarantee against the fair value of the remaining instrument (a bond absent the put option) declining below the put price. The embedded put option does not meet the characteristic in paragraph 460-10-15-4(a) because the guaranteed party's asset is an investment in the entire contract, a puttable bond, and not an investment in a nonputtable bond. However, as noted in paragraph 460-10-55-6, if the investor purchased a freestanding put option on a nonputtable bond and accounted for them separately, that guarantee would be within the scope of this Topic. - d
An arrangement, such as a securitization, that involves the subordination of the rights of some investors (or creditors) to the rights of others is commonly thought of as a guarantee issued by the subordinated investors. For example, the investors in one (subordinated) class or tranche of an entity's securities might not receive any cash flows until the investors in another (priority) class or tranche are fully paid. Although that type of subordination provides credit protection by the subordinated investors, it does not meet any of the characteristics in paragraph 460-10-15-4 and, thus, is not included in the scope of this Topic. - e
A written option that does not directly guarantee another entity's performance or the fair value of the guaranteed party's assets (such as a weather derivative) is not included in the scope of this Topic unless that written option is used as an indirect guarantee of the indebtedness of others. - f
A take-or-pay contract is not included in the scope of this Topic because the minimum payments under a take-or-pay contract are not contingent. A take-or-pay contract requires certain minimum payments irrespective of whether the buyer accepts delivery. Even if a take-or-pay contract were analyzed as though it were a guarantee by the buyer to pay for the portion of the minimum quantity of product or output of the guaranteed party for which the buyer refuses to order or accept delivery, a take-or-pay contract would not be included in the scope of this Topic because it would be a guarantee related to the buyer's future performance under the contract. (Take-or-pay contracts are further discussed in the Unconditional Purchase Obligations Subsections of Subtopic 440-10.) - g
A weather derivative is not included in the scope of this Topic because the climatic or geological variable is not an asset or liability of the guaranteed party. The characteristic in paragraph 460-10-15-4(a) requires payments to be based on changes in an underlying that is related only to an asset or liability of the guaranteed party.
The following is an example of a contract that is outside the scope of this Topic because it is of the type described in paragraph
460-10-15-7(g).
- a
- b
- 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 . - d
- e
The following are examples of contracts that are outside the scope of this Topic because these contracts are of the type described in paragraph
460-10-15-7(i):
- a
A lessee will often indemnify a lessor for any adverse tax consequences that may arise from acts, omissions, and misrepresentations of the lessee (for example, using the leased asset outside the United States or subleasing to a tax-exempt entity). The lessee is, in effect, guaranteeing that its own future performance and actions with respect to the lease and the leased property will not result in adverse tax consequences to the lessor. Thus, that lessee's indemnification is not within the scope of this Topic. In contrast, as discussed in paragraph 460-10-55-13(b), a guarantee by a lessee regarding the effect of future changes in the tax law on the guaranteed party's tax liability is within the scope of this Topic because the lessee cannot change the tax law (or prevent a change) and thus cannot control whether payments will be required under the guarantee. - b
An entity's guarantee of its own future performance, such as that entity's completion of a contract by a specified deadline is not within the scope of this Topic.
- c
In consolidated financial statements, a parent's guarantee of a subsidiary's debt to a third party would simply be a guarantee of the consolidated entity's own performance to make the scheduled payments on that consolidated liability, which is not a guarantee within the scope of this Topic for the consolidated reporting entity.
The following is an example of a contract that is not subject to the General Subsections of Sections
460-10-25 and
460-10-30 because it is of one of the types described in paragraph
460-10-25-1. The contract is subject to the
General Subsection of Section 460-10-50.
Although paragraph
460-10-25-4 does not prescribe a specific account, the following illustrate a guarantor's offsetting entries when it recognizes the liability at the inception of the guarantee:
- a
If the guarantee were issued in a standalone transaction for a premium, the offsetting entry would be consideration received (such as cash or a receivable).
- b
If the guarantee were issued in conjunction with the sale of assets, a product, or a business, the overall proceeds (such as the cash received or receivable) would be allocated between the consideration being remitted to the guarantor for issuing the guarantee and the proceeds from the sale. That allocation would affect the calculation of the gain or loss on the sale transaction.
- c
If the guarantee were issued in conjunction with the formation of a partially owned business or a venture accounted for under the equity method, the recognition of the liability for the guarantee would result in an increase to the carrying amount of the investment.
- d
- e
If a guarantee were issued to an unrelated party for no consideration on a standalone basis (that is, not in conjunction with any other transaction or ownership relationship), the offsetting entry would be to expense.
This implementation guidance addresses the application of this Subtopic to the recognition and initial measurement of a tax indemnification provided by a lessee to a lessor.
Paragraph 460-10-25-4 requires that the lessee (guarantor) account for a tax indemnification provided to the lessor by recognizing a liability at lease inception (which is also the inception of the indemnification clause). Section 460-10-30 requires that the measurement objective of that initial recognition be the fair value of the lessee's obligation under the indemnification agreement.Entity A operates a shipping center in Local City. In 19X0, Entity A decided to raise money for modernization of facilities through a debt offering. In order for the offering to take place, Entity B, a local manufacturer, agreed to guarantee the bonds if Entity A's revenues were insufficient to pay debt service. In May 19X4 (four years later when the bonds had an outstanding balance of $55 million), Entity A lost two of its major shipping customers, constituting 35 percent of its prior-year revenues, to a competitor in a neighboring port. At Entity B's June 30, 19X4, year end, Entity A was directing substantial efforts toward finding new customers. It is reasonably possible, however, that Entity A will not replace the lost revenue in time to pay debt service installments at December 30, 19X4, and June 30, 19X5, totaling $6 million.
Entity B would make the following disclosure.
In 19X0, Entity B guaranteed the Series AA debt of Entity A, which operates a shipping center within Local City. Entity B continues as guarantor of such debt totaling $55 million. In May 19X4, Entity A lost two of its major customers. Although Entity A is directing substantial efforts toward obtaining new customers, it is at least reasonably possible that Entity A will not replace lost revenues sufficient to make its December 19X4 and June 19X5 debt service payments totaling $6 million. If so, Entity B will become responsible for repayment of at least a portion of that amount and possibly additional amounts over the debt term. A liability of $XX has been reported in Entity B's financial statements pending the outcome of Entity A's efforts during the next fiscal year.
This Example illustrates the application of the scope of this Topic to a licensee indemnification.
For embedded put options indexed to the stock of a consolidated subsidiary, see paragraphs
.
For guarantees that represent contingent consideration in a business combination, see Subtopic
805-30.
For freestanding derivative instruments indexed to, and potentially settled in, the stock of a consolidated subsidiary, see paragraphs
815-10-15-77 and
810-10-45-16A.
For transactions that involve the sale of a marketable security to a third-party buyer, with the buyer's having an option to put the security back to the seller at a specified future date or dates for a fixed price, see the guidance beginning in paragraph
860-20-55-20.
The following table identifies the changes made to this Subtopic.
This Subtopic provides guidance on accounting for guarantees for health care entities within the scope of this Topic.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
954-10-15.