[inviteyou]

There is an AICPA practice FAR SIM on disclosures about a loan guarantee. REV guaranteed a loan for third party for $500,000. At the inception of the guarantee REV recognized a $150,000 liability for this guarantee. Later the third party defaulted on the $500,000 loan and REV will need to pony up the $500,000 as the guarantor. I understand they will have to disclose because it is a probable loss contingency, but what I don’t understand is why they will record $500,000 as a liability rather than $350,000 since they already recognized $150,000. Wouldn’t they just record $350,000 since they already recognized $150,000 as a liability at the time of inception–to round out the full $500,000? What am I missing here?

[AndreA]

Because it's a loan guarantee, if I remember correctly we have to accrue and disclose that. It's tricky and you just need to remember that.

[Silent]

Because they now know their liability will be 500k. If you only now record only 350k, investors might see it as two different liability. One for 150 k and one for 350 k

[TheeAccountant]

Without more information it’s hard for me to say for sure what is going on in the question. If they credited a liability for $150k then they should only credit another $350k when they learn they’re on the hook for the whole amount. Obviously, they’ll disclose the full amount as well.

[AndreA]

I hope it will help, just remember that.
Entities may guarantee the debt of an affiliate to help the affiliate obtain a loan or a line of credit. The guarantor must be ready to comply with the guarantee if the triggering event occurs (e.g., default by the debtor whose debt is guaranteed by the guarantor).

The guarantor is required to disclose the following:
The nature of the guarantee, the term of the guarantee, how the guarantee came into existence, and the triggering event
The maximum future amount payable under the guarantee
The carrying amount of the liability
A description of recourse provisions or available collateral enabling the guarantor to recover the amounts paid under the guarantee, if any
If it is probable that the triggering event will occur and the guarantor will be required to pay under the terms of the guarantee, then the guarantor must accrue a liability associated with the guarantee.

[Author]

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