Fair Value Measurement: Practical Guidance and Implementation, 2nd Edition

APPENDIX TWELVE A

Measuring the Fair Value of a Loan Guarantee

A loan guarantee is an example of a nonfinancial contingent liability. The FASB Master Glossary defines a contingency as “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an entity that will ultimately be resolved when one or more future events occurs or fails to occur.” In a business combination, assets and liabilities arising from contingencies are recognized as of the acquisition date when the fair value can be determined during the measurement period. If the acquisition date fair value cannot be determined during the measurement period, the contingent asset or liability would be recognized at the acquisition date if (1) information is available before the end of the measurement period that indicates an asset existed or a liability had been incurred, and (2) the amount can be reasonably estimated.1 Examples of nonfinancial contingent liabilities include warranties, environmental liabilities, litigation matters, and guarantees.

A guarantee is a formal promise to assume responsibility for the debts or obligations of another person or entity if that person or entity fails to meet the obligation. From the guarantor's standpoint, the guarantee is a contingent obligation. FASB ASC 360, Guarantees, requires that the guarantor recognize a liability for the guarantee in the statement of financial position at the inception of the guarantee. The accounting for the ...