On May 22, 2002, the Financial Accounting Standards Board (FASB) released an exposure draft (ED) of a proposed Interpretation entitled, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others."

The accounting and disclosure requirements for guarantees were reconsidered in connection with FASB's post-Enron project on accounting for special purpose entities (SPEs). Enron had considerable off-balance sheet debt in the form of guaranteed loans for its affiliated partnerships. Some have argued that Enron's guarantees were not adequately disclosed because the existing accounting rules were not clear.

The scope of the project was difficult to nail down. As it stands now, FASB's ED covers some, but not all, letters of credit, indemnification agreements, and indirect guarantees. For example, it covers financial standby letters of credit, (which are irrevocable guarantees to pay when an event occurs, such as a significant deterioration of financial condition), but it does not cover commercial letters of credit or product warrantees.

If approved as proposed, the Interpretation would:

• Clarify and expand on existing disclosure requirements for guarantees, including loan guarantees.
• Require companies to recognize a liability for the fair value, or market value, of their obligations under a guarantee at the time the guarantee is issued.

The disclosure requirements would be effective for interim or annual periods ending after October 15, 2002. The initial recognition and measurement provisions would need to be applied to all previously issued guarantees in the first fiscal year beginning after September 15, 2002.

The comment period ends June 21, 2002. Download the exposure draft.

-Rosemary Schlank