The interpretation, which expands on the accounting guidance of FAS 5, 57, and 107, instructs companies to recognize loan-guarantee liabilities, at their market value, at the time the guarantee is issued. Previously, loan guarantees were kept off a company's balance sheet until the company was required to honor them. The value of the guarantees must be disclosed in interim and annual financial statements.
The new rule would apply to letters of standby credit and to manufacturer's recourse loans. It would not apply to guarantees issued by insurance companies, to guarantees accounted for as derivatives, to product warranties, or to lessees' residual value guarantees embedded in capital leases.
The two-month-old interpretation hasn't drawn much fire since adoption, but take care: It hasn't been road-tested yet. Your mileage may vary.
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