4.13 Guarantees
Liabilities for guarantees made by the acquiree that are assumed by the acquirer
must be measured at fair value as of the acquisition date. After assets and
liabilities are initially recognized in a business combination, other GAAP generally
provide guidance on the subsequent accounting for them. However, ASC 460 does not
provide detailed guidance on how to measure the guarantor’s liability for its
obligations under the guarantee after its initial recognition. Typically, the
liability that an acquirer initially recognizes as of the acquisition date would be
reduced (by a credit to earnings) as it is released from risk under the guarantee.
In some instances, the release from risk does not occur until the expiration of the
guarantee’s settlement. ASC 460-10-35-2 states, in part:
A
guarantor shall not use fair value in subsequently accounting for the liability
for its obligations under a previously issued guarantee unless the use of that
method can be justified under generally accepted accounting principles (GAAP).
For example, fair value is used to subsequently measure guarantees accounted for
as derivative instruments under Topic 815.
At the 2003 AICPA Conference on Current SEC Developments, then SEC OCA
Professional Accounting Fellow Gregory Faucette stated the following:
So what do we believe the appropriate “day two” accounting for
the obligation to stand ready would be? . . . It would seem a systematic and
rational amortization method would most likely be the appropriate accounting. .
. .
We understand that some believe that a fair value
model for these guarantee liabilities and recourse obligations is the right
accounting. However, we find it difficult to support such an approach in the
current literature.
ASC 460 does not apply to guarantees between parents and their subsidiaries. If
an acquirer and acquiree previously entered into a guarantee arrangement, the
guarantee is not recognized as part of the business combination; however, the
acquirer must determine whether the transaction represents the settlement of a
preexisting relationship (see Section 6.2.2). The acquirer would also be subject to the disclosure
requirements in ASC 460.