5.5 Disclosure Requirements

50-1 The requirements in paragraphs 460-10-50-2 through 50-4 apply to guarantees, including guarantees that are outside the scope of paragraph 460-10-15-4; however, they do not apply to guarantees described in paragraph 460-10-15-7.

50-2 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:

1. Guarantees of indebtedness of others, including indirect guarantees of indebtedness of others
2. Obligations of commercial banks under standby letters of credit
3. Guarantees to repurchase receivables (or, in some cases, to repurchase the related property) that have been sold or otherwise assigned
4. Other agreements that in substance have the same guarantee characteristic.

50-3 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.

50-4 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:

1. 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.
2. 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.
3. 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
4. The nature of any recourse provisions that would enable the guarantor to recover from third parties any of the amounts paid under the guarantee
5. 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
6. 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).

50-5 The disclosures required by this Subsection do not eliminate or affect the following disclosure requirements:

1. The requirements in the General Subsection of Section 825-10-50 that certain entities disclose the fair value of their financial guarantees issued
2. The requirements in paragraphs 450-20-50-3 through 50-4 that an entity disclose a contingent loss that has a reasonable possibility of occurring
3. The requirements in the Disclosure Sections of Topic 815, which apply to guarantees that are accounted for as derivatives
4. The requirements in Section 275-10-50 that an entity disclose information about risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term. See Example 1 (paragraph 460-10-55-25) for an illustration of the required disclosure.
5. The requirements in Section 326-20-50 that an entity disclose information on the measurement of credit loss.

55-25 This Example illustrates the disclosure required by paragraph 275-10-50-15(j) of the potential near-term effect of a change in estimate of a contingent liability resulting from the guarantee of the debt of another entity. Entity A’s loss of customers causes the potential for a near-term material change in that estimate within the next fiscal year. Although disclosure of Entity A’s ongoing efforts to replace those customers is not required, this additional information may be presented.

55-26 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.

55-27 Entity B would make the following disclosure.