FASB Up-DateFIN No. 45 – Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (November 2002)Guarantee contracts covered have ANY of the following characteristics:THE INTERPRETATIONThe debit side of the entity is not prescribed by FIN 45. Some examples provided include:Arrangements not covered by FIN 45Scope exceptions from only the initial recognition and initial measurement provisionsDISCLOSURES ABOUT A GUARANTOR’S OBLIGATIONSLecture Notes for Acct 592 Prof. Teresa GordonFASB Up-DateFIN No. 45 – Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (November 2002)An intepretation of FASB No. 5, 57, 107. This interpretation REPLACES FIN No. 34Scope: Covers disclosures to be made in interim and annual reports regarding guarantees of indebtedness of others (disclosed under FASB No. 5 even though the probability is generally “remote”Guarantee contracts covered have ANY of the following characteristics:a. Contracts that contingently require the guarantor to make payments to the guaranteed partybased on an “underlying”Examples:Irrevocable standby letter of credit which guarantees payment of a specified obligationMarket value guarantee of asset owned by the guaranteed partyGuarantee of the market price of common stock of the guaranteed partyGuarantee of the collection of cash flows from assets held by special purpose entityb. Performance standby letter of credit or similar arrangements in which guarantor must makepayments to the guaranteed party in the event of another entity’s failure to perform under a nonfinancial contractc. Indemnification agreements that require guarantor to make payments to the indemnified party (guaranteed party) based on changes in an “underlying” such as an adverse judgment in a lawsuit, imposition of additional taxes due to adverse interpretation of the lawd. Indirect guarantees of the indebtedness of others even though the payment to the guaranteed party may not be based on an underlying asset, liability, etc., of the guaranteed party.1Lecture Notes for Acct 592 Prof. Teresa GordonTHE INTERPRETATIONThe issuance of a guarantee obligates the guarantor (issuer) in two respects:1. The guarantor undertakes an obligation to stand ready to perform over the term ofthe guarantee i the event that the specified triggering events or conditions occurThis is the noncontingent part of the obligation2. The guarantor undertakes a contingent obligation to make future payments if those triggering events or conditions occurThis is the contingent part of the obligationFASB 5 should not be interpreted as prohibiting the guarantor from initially recognizing a liability for that guarantee even though it is not probable that the payments will be required under that guarantee.At the inception of a guarantee, the guarantor shall recognize in its statement of financial position a liability for that guarantee, measured as follows:a. The premium received or receivable – when the guarantee is issued in a standalone arm’s-length transaction with an unrelated partyb. When the guarantee is part of a transaction with multiple elements, estimate the fairvalue of the guarantee.Consider the premium which would be required by the guarantor to issue a standalone guarantee with an unrelated partyIn the absence of observable transactions for identical or similar guarantees, use expected present value measurement techniquesc. If a guarantor must recognize a guarantee at inception because it is probable and can be estimated (FASB 5), the amount to initially recognize is the GREATER of the fair value of the guarantee (as measured above) or the contingent liability amount required under paragraph 8 of Statement 5.d Not for profit situation: guarantees provided as a contribution to an unrelated party(like a loan guarantee by a community foundation to a nonprofit entity), the guarantee (gift) should be measured at the fair value of the guarantee and NOT considered merely a conditional promise to give.2Lecture Notes for Acct 592 Prof. Teresa GordonThe debit side of the entity is not prescribed by FIN 45. Some examples provided include:a. If a premium is received, the debit would be to cash or receivable.b. If the fair value of the premium is an allocation of the receivable or cash received on a transaction that involves other assets, liabilities, etc., the allocation to the guarantee will affect the calculation of the gain or loss on the transaction.c. If the guarantee is associated with the acquisition of a business accounted for under the equity method, the guarantee would increase the carrying value of the investment.d. In an operating lease situation, the guarantee would affect prepaid rent.e. If no consideration is received, the offsetting entry would be to expense.Arrangements not covered by FIN 451. Commercial letters of credit and loan commitments2. Subordination of some securities that gives another class or tranche priority in the event of liquidation, etc.3. Guarantees excluded from scope of FASB 5, para. 74. A lessee’s guarantee of the residual value of leased asset (capital lease only)5. A contract that is accounted for as contingent rent under FASB 136. Guarantee issued by insurance company under FASB No. 60, No. 97, No. 113, or No. 1207. A contract that meets the criteria BUT provides for payments that constitute a vendor rebate (by the guarantor) based on either sales revenue of, or number of units sold by, the guaranteed party.8. Guarantee 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.Scope exceptions from only the initial recognition and initial measurement provisions1. Guarantees accounted for as a derivative under Statement 1332. Product warranties (the disclosure requirements of FIN 45 do apply – see below)3. Guarantees issued in a business combination (Statement 141)4. Guarantees for which the guarantor’s obligation would be reported as an equity item (rather than a liability) under GAAP5. Guarantee by an original lessee that has become secondarily liable under a new lease that relieved the original lessee from being the primary obligor (principal debtor) – says to not apply this section to secondary obligations that are not