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Minutes Archive

Financial Guarantees


Minutes of Meeting, April 18-20, 2012

The Board discussed issues related to recognition of liabilities resulting from extending financial guarantees as a result of nonexchange transactions in financial statements prepared using the current financial resources measurement focus and modified accrual basis of accounting. The Board tentatively agreed that liabilities resulting from the extension of financial guarantees as a result of nonexchange transactions should be recognized in financial statements prepared using the current financial resources measurement focus and modified accrual basis of accounting in the period the liabilities are normally expected to be liquidated with expendable available financial resources.

The Board also discussed transition and effective dates for the proposed Statement. The Board tentatively agreed that the provisions of the proposed Statement should be applied retroactively except for requirements related to disclosure of cumulative payments made or received as a result of financial guarantees. For such disclosures, the Board tentatively agreed that prospective application would be permitted. The Board tentatively agreed the effective date of the proposed Statement should be for periods beginning after June 15, 2013, with early application encouraged.

The Board concluded its discussion with a review of a draft of the proposed Standards section and provided suggestions to the project staff for revisions.

Minutes of Meeting, March 6-8, 2012

The Board discussed issues regarding the recognition of financial guarantees resulting from nonexchange transactions when both the government extending the guarantee and the government whose obligation is guaranteed are a part of the same reporting entity. The Board tentatively agreed that liabilities for guarantees extended on obligations within the same reporting entity should not be recognized until the government extending the guarantee is required to make a payment on the guarantee or has legally assumed the liability for the obligation.

The Board also considered whether the financial guarantees project also should include guarantees resulting from exchange transactions. The Board tentatively agreed that the scope of the financial guarantees project should be limited to guarantees provided and received as a result of nonexchange transactions.

The Board discussed note disclosures for both governments that extend financial guarantees and governments that issue obligations that have financial guarantees as a result of nonexchange transactions. The Board tentatively agreed that governments should disclose the following information about the nature of guarantees extended:

  • Description of the obligations that are guaranteed for each type of financial guarantee extended
     
  • Legal authority and limits for providing financial guarantees
     
  • Relationship between the guarantor and the entity or entities issuing the obligations that are guaranteed
     
  • Summary of the events that would require indemnification payments
     
  • Description of recovery arrangements
     
  • Length of time of the guarantees. 
In addition, the Board tentatively agreed that governments should disclose the following information about the amounts of guarantees extended:

  • A schedule of changes in recognized liabilities, disclosing beginning- and end-of-year balances, increases, decreases, and adjustments
     
  • A brief discussion on timing of recognition and measurement
     
  • Amount of guarantees that are outstanding
     
  • Amount of commitments to extend guarantees
     
  • Cumulative amounts paid toward guarantees outstanding
     
  • Amounts expected to be recovered.
The Board also tentatively agreed that governments that issue guaranteed obligations should disclose the following information in relation to the guarantee:

  • Name of the entity providing the guarantee
     
  • Summary of the events or circumstances that would require the guarantor to make payment
     
  • Dollar amount of obligations guaranteed
     
  • Length of time of the guarantee on the obligations
     
  • Amount paid by the guarantor toward obligations during the current reporting period
     
  • Amount paid by the guarantor on outstanding obligations
     
  • Description of requirements to repay guarantor
     
  • Commitments to receive guarantees for unissued obligations.
Minutes of Meeting, January 24-26, 2012

The Board continued to discuss recognition and measurement issues of governments that in the context of a nonexchange transaction (1) issue obligations that have been guaranteed by another entity or (2) hold obligations that have been guaranteed by an entity other than the issuer of the obligation. The Board also discussed recognition and measurement of a contractual obligation to receive reimbursement for an indemnification payment that is made by a government extending a financial guarantee.

The Board discussed recognition and measurement issues of governments that have issued obligations that have been guaranteed by another entity as a result of a nonexchange transaction. The Board tentatively decided to propose that a government that issues an obligation that is guaranteed as a result of a nonexchange transaction should recognize a reduction in its liability for the obligation when a guarantor makes an indemnification payment or legally assumes all or a portion of the obligation from the issuing government. The amount recognized should be measured as the amount of the indemnification payment made or the amount of the obligation assumed by the guarantor.

The Board also considered the requirement of a government issuing a guaranteed obligation to repay a guarantor for an indemnification payment made on-behalf of the issuer government. The Board tentatively decided to propose that when an issuer government is required to repay a guarantor for an indemnification payment made, the issuer government should reclassify its liability as being due to the guarantor or, when the guarantor purchased the obligation from the obligation holder, should continue to report the obligation as a liability until legally released as an obligor.

The Board also discussed recognition and measurement issues of governments that are holders of obligations that have been guaranteed by an entity other than the issuer of the obligation. The Board tentatively agreed that recognition and measurement guidance need not be addressed in the financial guarantees project for governments holding an obligation that is guaranteed by an entity other than the issuer.

Minutes of Meeting, December 13-15, 2011

The Board discussed recognition and measurement issues for a single guarantee extended by a government as a result of a nonexchange transaction and for groups of guarantees extended by a government as a result of nonexchange transactions.

The Board discussed qualitative factors that may indicate that an indemnification payment is more likely than not and agreed that depending on whether the guaranteed obligation is secured by an issuing entity’s general credit or a specific pledged revenue source, the qualitative factors used may vary.

The Board also tentatively agreed that for a single guarantee extended as a result of a nonexchange transaction for which qualitative factors indicate that it is more likely than not an indemnification payment will be made, the amount of the liability should be measured using a cost accumulation approach. The measured amount would be:
  1. The best estimate of the amount expected to be incurred to settle the liability, or
     
  2. The minimum amount in a range of estimated values when no amount in the range is better than any other amount in the range.
The Board also tentatively decided that for multiple guarantees with similar characteristics extended as a result of nonexchange transactions, a government should use the same recognition and measurement requirements as would be applied to a single guarantee.

Minutes of Meeting, November 8-10, 2011

The Board continued discussions on issues regarding the recognition of financial guarantees of a government that extends a financial guarantee as a result of a nonexchange transaction.

The Board tentatively agreed to propose that a guarantee that is legally enforceable or is a constructive commitment meets the definition of an obligation. The Board also tentatively agreed to propose that a guarantee becomes a liability of a government extending the guarantee when qualitative factors indicate that it is more likely than not that a payment will be made as a result of the guarantee.

The Board also discussed potential qualitative factors that could be included in a government’s assessment that a payment will more likely than not be made and will continue deliberations on proposed guidance for this assessment at future meetings.

Minutes of Meeting, October 3-5, 2011

The Board discussed issues regarding the recognition and measurement of financial guarantees of a government that extends a nonexchange-based financial guarantee.

The Board discussed the incorporation of the recognition requirements of providers in Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, for recognition of nonexchange-based guarantees extended by a government. The Board tentatively decided to consider these requirements after discussion of other recognition and measurement issues.

The Board also discussed whether events should be specified that require a guarantor to recognize and measure a liability resulting from extending a nonexchange-based financial guarantee. Rather than requiring recognition and measurement as a result of certain events, the Board tentatively agreed to examine principles-based recognition and measurement requirements for guarantors that extend nonexchange-based financial guarantees.

The Board also considered the effect of recoveries such as intercept programs on the measurement of a liability by a guarantor of a nonexchange-based financial guarantee. The Board tentatively agreed that intercept programs generally have characteristics that make them distinct from financial guarantees, although there could be intercept arrangements that are similar to a financial guarantee.

Minutes of Meeting, August 17-19, 2011

The Board tentatively decided that the focus of the financial guarantees project is on guarantees provided and received as a result of nonexchange transactions.

The Board also discussed guarantees between a primary government and its component units, and it tentatively agreed that both discretely presented and blended component units should be considered separate entities for purposes of applying the proposed provisions of the financial guarantees project.

The Board reviewed measurement approaches that could potentially be applied to financial guarantee transactions but made no tentative decisions. The Board will continue to discuss both recognition and measurement approaches at the October 2011 meeting.

Minutes of Teleconference, July 26, 2011

The Board discussed the definition of a financial guarantee as well as the scope of the financial guarantees project. The Board tentatively agreed that the definition should contain the following attributes: the guarantor is required to perform an action—indemnification—under specified conditions, and the guarantor is an entity separate from the entities involved in the underlying transaction being guaranteed. The Board also tentatively agreed to the types of guarantees that would be within the project scope, including guarantees of debt issued by other governments, guarantees of economic development loans, guarantees of student loans, certain intercept programs, moral obligations, lines and letters of credit, and insurance (coordinated with existing authoritative guidance).