FAR, Financial Accounting and Reporting
Sources for Guarantees
Last reviewed
The standards and authorities behind PocketCPA's FAR lessons on Guarantees. The topic rests on ASC 460.
About this topic
A guarantee is a promise to stand behind someone else's obligation, and accounting for one is trickier than it first looks. A single guarantee creates two different accounting events at the same moment, and ASC 460 governs how the guarantor reports both.
The Topic requires a liability on the balance sheet the instant the guarantee is issued, even though no one has defaulted and the guarantor may never pay a dollar. That is the counterintuitive part the FAR exam likes to test. Issuing a guarantee is itself a recordable event, separate from any later payout.
Key points
- A guarantee is recognized at fair value at inception when it obligates the guarantor to stand ready to perform.
- Three categories determine treatment: outside the scope entirely, inside for disclosure only, or fully inside for recognition and disclosure.
- Product warranties and indemnification clauses are common guarantees that require initial fair value measurement.
- The subsequent measurement follows a contingency model: the greater of the initial fair value or the contingent amount.
What the lessons cover
- Scope: which contracts are guarantees (ASC 460-10-15-4)
- Two obligations in one contract: the dual nature (ASC 460-10-25-2)
- Initial recognition and measurement at fair value (ASC 460-10-30-2)
- Subsequent measurement: release from risk (ASC 460-10-35-2)
- Product warranties: a special subset (ASC 460-10-25-5)
- Disclosures (ASC 460-10-50-4)
Authoritative references
- ASC 460-10-15-4 and 15-7, scope: which contracts are guarantees, and the exclusions that still stand behind the scope, including a registration payment arrangement under ASC 825-20.
- ASC 460-10-25-1, the recognition rules, with some guarantees inside the Subtopic but exempt from recognition.
- ASC 460-10-25-2 and 25-3, the two obligations in one contract, and the rule that the ASC 450-20 threshold does not block initial recognition of the stand-ready obligation.
- ASC 460-10-25-4, a guarantee fully inside the Subtopic, recognized and disclosed.
- ASC 460-10-25-5, 25-6 and 25-8, product warranties as a special subset, the inability to estimate that precludes accrual, and the treatment of service-type warranties as revenue.
- ASC 460-10-30-2, initial recognition and measurement at fair value.
- ASC 460-10-30-3 through 30-5, which of the two measures the single guarantee liability carries, the unusual case where the ASC 450-20 amount exceeds fair value, and the contingent amount accounted for separately.
- ASC 460-10-35-1, 35-2 and 35-4, subsequent measurement: release from risk, and the contingent aspect after inception under ASC 450-20 unless the guarantee is a derivative under Topic 815 or falls within ASC 326-20.
- ASC 460-10-45-1, presentation of the credit-loss accrual on an off-balance-sheet exposure as a liability separate from any valuation account.
- ASC 460-10-50, 50-1 and 50-2 through 50-4, the disclosure scope and requirements, including the maximum potential amount of future undiscounted payments at 50-4(b).
- ASC 460-10-50-5, other disclosures the Subtopic does not displace.
- ASC 460-10-50-8, the tabular roll-forward of the product warranty liability.
- ASC 460-10-55-21 through 55-23, the stated premium as a practical expedient for fair value, a guarantee with no premium, and the offsetting entries.
Related requirements outside the Topic:
- Loss contingencies, ASC 450-20, including ASC 450-20-25, 25-2, 30 and 50-3 through 50-4.
- Credit losses, ASC 326-20, including the disclosures at ASC 326-20-50.
- Risks and uncertainties, ASC 275-10-50.
- Fair value of financial guarantees, ASC 825-10-50.
How PocketCPA uses these sources
Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.