ASC 460, Guarantees, tells a guarantor when a promise to pay if something happens becomes a recorded liability and what the notes must say about it. The topic matters in audits of private companies that guarantee a bank loan of an affiliate, a customer or a former subsidiary, and in any engagement where indemnities were given in a sale of a business. This page covers scope, the two measurement components, the disclosures, and the procedures an auditor applies. For the loss-contingency model that sits underneath, see ASC 450 loss contingencies.
Which contracts are guarantees under ASC 460?
ASC 460-10-15-4 applies the topic to four types of contract:
- Contracts that contingently require the guarantor to pay the guaranteed party based on changes in an underlying related to an asset, a liability or an equity security of the guaranteed party (financial guarantees, such as a standby letter of credit that supports a loan).
- Contracts that contingently require payment because another entity fails to perform under an obligating agreement (performance guarantees).
- Indemnification agreements that contingently require payment based on changes in an underlying related to an asset, a liability or an equity security of the indemnified party.
- Indirect guarantees of the indebtedness of others, even when the payment is not tied to such an underlying.
Payment can be in cash, other assets, shares or services, and settlement can be gross or net, so both financial and nonfinancial contracts can be caught.
What is outside the topic?
ASC 460-10-15-7 excludes certain contracts entirely, from recognition, measurement and disclosure. They include guarantees excluded from ASC 450 (primarily employment-related), a lessee's residual value guarantee under ASC 842, guarantees issued by insurance entities that are accounted for under ASC 944, guarantees of an entity's own future performance, credit derivatives carried at fair value under ASC 815, and registration payment arrangements. The "own performance" exception covers entities within the reporting entity's consolidated group. KPMG's contingencies handbook points out that an investor's guarantee of an equity-method investee's debt is a guarantee of the investee's performance, so the exception does not apply.
Other guarantees are in scope for disclosure but not for the general recognition provisions of ASC 460-10-25-1. They include guarantees issued between a parent and its subsidiaries or between corporations under common control, a parent's guarantee of a subsidiary's debt to a third party, and a subsidiary's guarantee of debt owed by its parent or a sister company. Product warranties have their own subsections.
How is a guarantee measured at inception?
A guarantee has two components. The noncontingent, or stand-ready, component is the obligation to be ready to perform over the guarantee's term. The contingent component is the expected loss if the event occurs.
- The initial measurement objective is fair value (ASC 460-10-30-2). In a standalone arm's-length transaction with an unrelated party, the premium received or receivable is a practical expedient. If the guarantee is part of a multiple-element deal, such as one given when selling an asset, the entity estimates fair value and may consider what premium would be required in a standalone transaction. A liability is recognized even if no separate premium is received (ASC 460-10-55-22).
- For a guarantee that is neither in the scope of ASC 326-20 nor a market value guarantee in the scope of ASC 480, the initial liability is the greater of the noncontingent amount at fair value and the contingent amount measured under ASC 450-20 (ASC 460-10-30-3).
- For a guarantee that is also in the scope of ASC 326-20, or is a market value guarantee under ASC 480, the two components are recognized separately (ASC 460-10-30-5).
The offsetting entry depends on the facts. It can be cash received, a receivable, an expense, a contribution or part of the cost of an asset sold. ASC 460-10-25-4 does not prescribe one account.
How is the liability measured afterward?
Subsequent measurement of the noncontingent component is not prescriptive. The guarantor typically reduces the liability, with a credit to earnings, as it is released from risk, using the method that best reflects that pattern (ASC 460-10-35-1 and 35-2). Examples are release on expiration or settlement, or a systematic and rational amortization. Fair value is used afterward only where other GAAP permits it, such as for a derivative.
The contingent component follows ASC 450-20. KPMG describes two ways to apply this. Under a single combined liability, the guarantor records the ASC 450-20 amount only to the extent it exceeds the carrying amount of the noncontingent component. Under two separate liabilities, the contingent loss is recorded in addition to the noncontingent amount.
Illustrative example
Figures are illustrative. A company issues a three-year guarantee of an unrelated customer's $1,000,000 bank loan and receives a $12,000 one-time premium in an arm's-length transaction.
- At inception, the fair value practical expedient gives a liability of $12,000: debit cash $12,000, credit guarantee liability $12,000. No loss is probable, so there is no contingent component.
- The company releases the liability straight-line over the term: $12,000 / 3 = $4,000 per year. After two years the carrying amount is $12,000 - (2 x $4,000) = $4,000.
- At the end of year 2 the customer is in default and the company concludes a payment of $60,000 is probable and reasonably estimable under ASC 450-20.
- Using the single combined liability, the liability is increased to $60,000 by a charge of $60,000 - $4,000 = $56,000. With two separate liabilities, the company would record a $60,000 contingent liability and continue releasing the $4,000 remaining noncontingent liability.
The company must also disclose the guarantee whether or not a loss is probable.
What must be disclosed?
ASC 460-10-50-4 requires, for each guarantee or group of similar guarantees, even if payment is remote:
- the nature of the guarantee, including its approximate term, how it arose, the events that would require performance, and the current status of the payment or performance risk;
- the maximum potential amount of future payments (undiscounted, not reduced by recourse or collateral), or the fact that there is no limit, or why it cannot be estimated;
- the current carrying amount of the liability, if any;
- the nature of recourse provisions, and of any collateral or third-party assets the guarantor could use to recover amounts paid; and
- if estimable, the approximate extent to which those assets would cover the maximum potential payments.
ASC 460-10-50-2 and 50-3 separately require disclosure of certain guarantees even when loss is remote, including guarantees of the indebtedness of others, standby letters of credit and guarantees to repurchase receivables sold, with the nature and amount of the guarantee. A guarantee by an owner of the entity's debt is generally the owner's obligation, but the entity may need related party disclosure. See ASC 850 related party disclosures.
What do auditors test?
These are practice procedures, not steps listed in a standard.
- Read the debt agreements, leases and sale agreements for guarantee, indemnity and letter-of-credit language. A guarantee is often found in a loan covenant section rather than a note.
- Send bank confirmations that ask about guarantees and contingent liabilities, and review external confirmations under AU-C 505.
- Review board minutes, the legal letter and inquiries of management for indemnities given in asset or business sales (see AU-C 501).
- Check that the entity applied the correct scope exception, for example that a parent guarantee of a subsidiary's debt is not recorded as a guarantee liability but is still disclosed where required.
- Test the inception fair value to the premium or to a documented estimate, and recompute the release.
- Evaluate the ASC 450 assessment of the contingent component against the borrower's financial condition and subsequent events.
- Compare the disclosure to the 50-4 list, checking maximum potential payments and recourse.
- Identify guarantees to or for related parties as part of the AU-C 550 procedures.
Frequently asked questions
Is a parent's guarantee of its subsidiary's debt recorded as a liability?
No under ASC 460-10-25-1, which excludes it from the recognition provisions. The disclosure provisions can still apply to the guarantee, and in consolidated statements the underlying debt is already on the balance sheet.
Do you record a guarantee liability if no premium is received?
Yes. ASC 460-10-55-22 says the liability is recognized at inception even without a separately identified premium, measured at fair value.
Must a remote guarantee be disclosed?
Yes for guarantees within the disclosure provisions. ASC 460-10-50-4 applies even if the likelihood of payment is remote.
Is a standby letter of credit a guarantee?
A financial standby letter of credit that supports another party's obligation is a guarantee under ASC 460, while a commercial letter of credit used to pay for goods generally is not.
Sources
- FASB, Accounting Standards Codification Topic 460, Guarantees: 460-10-15-4, 15-7, 25-1, 25-4, 30-2, 30-3, 30-5, 35-1 through 35-4, 50-2 through 50-4, 55-22. https://asc.fasb.org
- KPMG, Handbook: Contingencies, commitments and guarantees (2025), chapter 7, Guarantees and product warranties.
- FASB, ASC 450-20, Loss Contingencies.
- AICPA, AU-C Section 505, External Confirmations, and AU-C Section 501, Audit Evidence--Specific Considerations for Selected Items.
Related
- ASC 450 loss contingencies
- Loss contingency
- ASC 850 related party disclosures
- Legal letter
- AU-C 550 related parties
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Part of CORAA University · US GAAP for private companies: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error