CUNA Regulatory Comment Call
June 14, 2002
Accounting and Disclosure Requirements for Guarantees
- The Financial Accounting Standards Board (FASB) has issued a proposal that would clarify and expand on existing disclosure requirements for guarantees, including loan guarantees. In addition, it would require that at the time a guarantor issues a guarantee, the guarantor must recognize a liability for the fair value, or market value, of its obligations under that guarantee.
- The proposal would require a guarantor to disclose the following:
- The nature of the guarantee, including how the guarantee arose and the events or circumstances that would require the guarantor to perform under the guarantee;
- The maximum potential amount of future payments under the guarantee;
- The carrying amount of the liability, if any, for the guarantor's obligations under the guarantee; and
- The nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee.
- The initial recognition and measurement provisions in the proposal would be applied to all previously issued guarantees in the first fiscal year beginning after September 15, 2002. The disclosure requirements would be effective for financial statements of interim or annual periods ending after October 15, 2002.
- FASB would like comments by June 21, 2002. Please send your comments to CUNA by June 21, 2002. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at email@example.com or to Senior Regulatory Counsel. Catherine Orr at firstname.lastname@example.org; or mail them to Mary or Catherine in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, 6th Floor - South Building, Washington, DC 20004. You can send comments to FASB by e-mail at email@example.com (please include File Reference 1124-001). Or you can mail your comments to MP&T Director - File Reference 1124-001, Financial Accounting Standards Board of the Financial Accounting Foundation, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116.
- You may contact CUNA if you would like a copy of FASBs proposal. Or you may obtain a copy of the proposal at the following Internet address: http://www.fasb.org/draft/ed_prop_interp_guarantees.pdf.
DESCRIPTION OF THE PROPOSAL
- This FASB proposal clarifies the requirements for a guarantors accounting for and disclosures of certain guarantees issued. This proposal, when finalized, would supercede the guidance contained in FASB Interpretation No. 34, Disclosures of Indirect Guarantees of Indebtedness of Others.
- This proposal would apply to guarantee contracts that have any of the following characteristics:
- Contracts that contingently require the guarantor to make payments (either in cash or in other assets, services or financial instruments) to the guaranteed party based on changes in an underlying (a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or any other variable, including the occurrence on nonoccurrence of a specified event such as a scheduled payment under a contract) that is related to an asset or liability of the guaranteed party. For example, the proposed provisions would apply to a financial standby letter of credit.
- Contracts that contingently require the guarantor to make payments (either in cash or in other assets, services or financial instruments) to the guaranteed party based on another entitys failure to perform under an obligating agreement (performance guarantees).
- Indemnification agreements (contracts) that contingently require the indemnifying party (guarantor) to make payments to the indemnified party (guaranteed party) based on the occurrence or nonoccurrence of a specified event or circumstance, such as an adverse judgment in a lawsuit or the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law.
- Indirect guarantees of the indebtedness of others, even though the payment to the guaranteed party may not be based on changes in an underlying that is related to as asset or liability of the guaranteed party.
- Due to its noncontingent obligation to stand ready to perform in the event that the specified triggering events or conditions occur, the guarantor shall recognize, at the inception of a guarantee, a liability for that guarantee in its statement of financial position. The guarantor shall recognize, a liability equal to the fair value of the entire guarantee (encompassing both the contingent and noncontingent elements) except in the unusual circumstance that the contingent liability recognized at inception under FASB Statement No. 5, Accounting for Contingencies.
- A guarantor is required to disclose the following information about each guarantee, or each group of similar guarantees, even if the likelihood of the guarantors having to make any payments under the guarantee is remote:
- The nature of the guarantee, including how the guarantee arose and the events or circumstances that would require the guarantor to perform under the guarantee.
- The maximum potential of future payments (undiscounted) the guarantor could be required to make under the guarantee. That maximum potential amount of future payments shall not be reduced by the effect of any amounts that may possibly be recovered under recourse or collateralization provisions in the guarantee.
- The current carrying amount of the liability, if any, for the guarantors obligations under the guarantee (including the amount, if any, recognized under Statement 5).
- The nature of (1) any recourse provisions that would enable the guarantor to recover from third parties any of the amounts paid under the guarantee and (2) 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. The guarantor shall indicate the approximate extent to which the proceeds from liquidation of those assets would be expected to cover the maximum potential amount of future payments under the guarantee.
QUESTIONS ABOUT THE PROPOSAL
- The proposal would require that at the time a guarantor issues a guarantee, the guarantor must recognize a liability for the fair
value (market value) of its obligations under that guarantee. Would this initial recognition and measurement provision cause undue
burden for your credit unions accounting practices as they relate to guarantees?
Yes ______ No ______
If so, can you quantify that burden?
- The proposal would require grantors to disclose more information regarding guarantees than under current practices, such as the
nature of the guarantee. Would making the additional disclosures set forth in this proposal cause undue burden in terms of your credit
unions accounting practices regarding guarantees?
Yes ______ No ______
If so, can you quantify that burden?
- Other comments?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Catherine Orr Senior Regulatory Counsel (202) 508-6743 email@example.com