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Chapter 4 — Recognizing and Measuring the Identifiable Assets Acquired and Liabilities Assumed

4.13 Guarantees

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.