ASC 440, Commitments, contains only one subtopic:
The Subtopic has two Subsections:
The General Subsection provides guidance for:
The Unconditional Purchase Obligation subsection provides guidance for unconditional purchase obligations, such as throughput and take-or-pay contracts.
ASC 440 applies to all transactions. However, for guidance on product financing arrangements, the preparer should look to ASC 470-40-15. Guidance on repurchase agreements within the scope of ASC 606 can be found in ASC 606-10-55-66 through 55-78 when ASU 2014-09 becomes effective.
All significant contractual commitments must be disclosed in the notes to the financial statements. For example, lease contract provisions, pension obligations, requirements contracts, bond indenture covenants, commitments to purchase or construct new facilities, and employee share-based compensation plans are to be clearly disclosed in the notes.
Source: ASC 440-10-20
Purchaser's Incremental Borrowing Rate. The rate that, at the inception of an unconditional purchase obligation, the purchaser would have incurred to borrow over a similar term the funds necessary to discharge the obligation.
Take-or-Pay Contract. An agreement between a purchaser and a seller that provides for the purchaser to pay specified amounts periodically in return for products or services. The purchaser must make specified minimum payments even if it does not take delivery of the contracted products or services.
Throughput Contract. An agreement between a shipper (processor) and the owner of a transportation facility (such as an oil or natural gas pipeline or a ship) or a manufacturing facility that provides for the shipper (processor) to pay specified amounts periodically in return for the transportation (processing) of a product. The shipper (processor) is obligated to provide specified minimum quantities to be transported (processed) in each period and is required to make cash payments even if it does not provide the contracted quantities.
Unconditional Purchase Obligation. An obligation to transfer funds in the future for fixed or minimum amounts or quantities of goods or services at fixed or minimum prices (for example, as in take-or-pay contracts or throughput contracts).
Through-put and take-or-pay contracts are sometimes used to help a supplier pay for new facilities, machines, or other expenditures. (See definitions above.) They are negotiated as a way of arranging financing for the facilities that will produce the goods or provide the services desired by a purchaser. Some of these contracts are reported on the statement of financial position as an asset and a liability. Others are not reported. Other than standards relating to recognition of losses on unconditional purchase obligations (ASC 330-10-35), there are no standards that require the contracts to be recognized on the statement of financial position. However, ASC 440 requires certain disclosures to be made.
Disclosures required by ASC 440 can be found in the Appendix.
3.22.74.3