26 ASC 405 LIABILITIES
ASC 405-20, Extinguishments of Liabilities
PERSPECTIVE AND ISSUES
Subtopics
ASC 405, Liabilities, consists of four subtopics:
- ASC 405-10, Overall, which merely points to other areas of the codification which contain guidance on liabilities
- ASC 405-20, Extinguishments of Liabilities, which provides guidance on when an entity should consider a liability settled
- ASC 405-30, Insurance-Related Assessments, which provides guidance on items such as assessments for state guaranty funds and workers' compensation second-injury funds
- ASC 405-40, Obligations Resulting from Joint and Several Liabilities, which provides guidance on arrangements where the total amount of the obligation is fixed at the reporting date.
ASC 405 provides accounting and reporting guidance related to short-term liabilities and certain guidance that may apply broadly to any liability. The Codification has several topics on liabilities, including ASC 470, Debt, and ASC 480, Distinguishing Liabilities from Equity.
Scope and Scope Exceptions
ASC 405 guidance applies to all entities with the covered transactions.
ASC 405-30 does not apply to the following:
- Amounts payable or paid as a result of reinsurance contracts or arrangements that are in substance reinsurance, including assumed reinsurance activities and certain involuntary pools that are covered by Topic 944.
- Assessments of depository institutions related to bank insurance and similar funds.
- The annual fee imposed on health insurers by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (the Acts). The accounting for the Acts' fee is addressed in Subtopic 720-50.
Overview
The FASB has declared, as a long-term goal, that all financial liabilities are to be recognized in the statement of financial position at fair values, rather than at amounts based on their historical cost. The proper calculation of fair value, as presented in ASC 820, Fair Value Measurements and Disclosures, is described in detail in the chapter on ASC 820. Under ASC 825, Financial Instruments, an entity has the option to record certain of its current liabilities that meet the definition of “financial liabilities” at their respective fair values, with changes in fair value recognized each period in net income. Liabilities that require the entity to provide goods or services to settle the obligation, instead of cash settlement, are not financial liabilities and thus are not eligible for the fair value measurement election permitted by ASC 825. This option is addressed in detail in the chapter on ASC 825.
Although measurement of liabilities is generally straightforward, some liabilities are difficult to measure because of uncertainties. Uncertainties regarding subsequent events, whether an obligation exists, how much of an entity's assets will be needed to settle the obligation, and when the settlement will take place can impact whether, when, and for how much an obligation will be recognized in the financial statements.
Most entities continue to measure their current liabilities at their settlement value, which is the amount of cash (or its equivalent amount of other assets) that will be paid to the creditor to liquidate the obligation during the current operating cycle. Accounts payable, dividends payable, salaries payable, and other current obligations are measured at settlement value because they require the entity to pay a determinable amount of cash within a relatively short period of time. If a current liability is near its payment date, there will be only an insignificant risk of changes in fair value because of changes in market conditions or the entity's credit standing, and settlement value and fair value will be essentially the same.
Other current liabilities are measured at the proceeds received when the obligation arose. Liabilities that are measured in this manner generally require the entity to discharge the obligation by providing goods or services rather than by paying cash. Deposits payable, or rents paid in advance on the statement of financial position of a lessor are examples of current liabilities measured by reference to proceeds received.
Technical Alert
ASU 2013-04, Liabilities (Topic 405) Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. Issued in February 2013, ASU 2013-04 is a consensus of the FASB Emerging Issues Task Force and was issued in response to diversity in practice. The guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date as the sum of:
- The amount the reporting entity agreed to pay on the basis of its arrangement among its obligors and
- Any additional amount the entity expects to pay on behalf of its co-obligors
The corresponding entry depends on the particular facts and circumstances.
The guidance applies to all entities and obligations such as debt arrangements, other contractual obligation, and settled litigation and judicial rulings. The guidance does not apply to obligations accounted for under the following topics:
- ASC 410, Asset Retirement and Environmental Obligations
- ASC 450, Contingencies
- ASC 460, Guarantees
- ASC 715, Compensation – Retirement Benefits
- ASC 740, Income Taxes.
The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 for public entities. For nonpublic entities, the amendments are effective for fiscal years ending after December 14, 2014, and interim periods and annual periods thereafter. The guidance should be applied retrospectively to all prior periods presented. Early adoption is permitted.
DEFINITIONS OF TERMS
Source: ASC 405-30-20 and ASC 405-40-20
In-Force Policies. Policies effective before a specified date that have not yet expired or been cancelled.
Incurred Losses. Losses paid or unpaid for which the entity has become liable during a period.
Involuntary Pools. A residual market mechanism for insureds who cannot obtain insurance in the voluntary market.
Life, Annuity, and Health Insurance Entities. An entity that may issue annuity, endowment, and accident and health insurance contracts as well as life insurance contracts. Life and health insurance entities may be either stock or mutual entities.
Nonpublic Entity. Any entity that does not meet any of the following conditions:
- Its debt or equity securities trade in a public market either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally.
- It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).
- It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market.
- It is required to file or furnish financial statements with the Securities and Exchange Commission.
- It is controlled by an entity covered by criteria (a) through (d).
Obligated to Write. A circumstance in which an entity has no discretion to cancel a policy because of legal obligation under state statute, contract terms, or regulatory practice and is required to offer or issue insurance policies for a period in the future.
Premium Tax Offsets. Offsets against premium taxes levied on insurance entities by states.
Premiums Written. The premiums on all policies an entity has issued in a period.
Property and Casualty Insurance Entity. An entity that issues insurance contracts providing protection against either of the following:
- Damage to or loss of property caused by various perils, such as fire and theft.
- Legal liability resulting from injuries to other persons or damage to their property.
Property and liability insurance entities may be either stock or mutual entities.
CONCEPTS, RULES, AND EXAMPLES
ASC 405-10, Overall
ASC 405-10 contains no guidance. Its purpose is to point to guidance in other areas of the Codification. ASC 410-10-02 points to the following Codification Topics which contain guidance on accounting and reporting on liabilities:
- Asset Retirement and Environmental Obligations - ASC 410
- Exit or Disposal Cost Obligations - ASC 420
- Deferred Revenue - ASC 430
- Commitments - ASC 440
- Contingencies - ASC 450
- Guarantees - ASC 460
- Debt - ASC 470
- Distinguishing Liabilities from Equity - Topic 480.
ASC 405-20, Extinguishments of Liabilities
A liability is extinguished when
- The debtor pays the creditor
- The debtor is legally given relief from the liability.
If the entity becomes a guarantor on the debt, the entity applies the guidance in ASC 460.