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Discussion:PFS - Personal Guarantees?

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Discussion Forum Index --> Accounting Questions --> PFS - Personal Guarantees?


Jimmer (talk|edits) said:

22 October 2012
2 individuals have personal guarantees on a debt that neither has the capacity to pay.

They're having me prepare PFS as part of the discovery process in a lawsuit related to the loan.

I rarely do PFS and client raised an interesting question after seeing my draft copy - what about the fact that they each have a personal guarantee for the full debt. I can't imagine if we're talking a $3MM debt, that you can put a $3MM liability on each of their financials.

Rather, I assume $1.5MM should be reported on the face of each financial, and the personal guarantee should be disclosed in the notes (which we're trying to prepare these without)??

Maybe I'm wrong, but it just seems to me that if each reports the full loan amount, though they are legally liable for the full amount, cumulatively they would be overreporting the debt, which in this particular case would be advantageous.

EmpireCPA (talk|edits) said:

22 October 2012
If one person(A) has 10MM in assets and no other liabilities and the other(B) has $0 assets and no other liabilities, how much liability should A's PFS include regarding this debt? How much should B's? I can't speak to the nature of the liability, but they may both be on the hook for the whole thing. I believe the proper approach, if they both have unlimited exposure, is to record the full $3MM on both and disclose the joint nature of the liability. Otherwise, any amount that you record on the PFS's is an arbitrary measure of each guarantor's exposure.

Jimmer (talk|edits) said:

22 October 2012
Both are heavily upside down. There's no chance they'll ever pay the debt. If the bank won't settle for a pittance, they'll declare bankruptcy.

What would you report in that situation?

Jimmer (talk|edits) said:

22 October 2012
To further complicate, the debt is actually in an LLC, and I'm reporting on their PFS the value of their investment in the LLC, as a single line.

If the full $3MM is required, do I just reduce each of their "investments" by another $1.5MM and then disclose the nature?

EmpireCPA (talk|edits) said:

22 October 2012
The fact that they will never pay it is irrelevant in questions regarding the existence of the liability. The ownership interest in the LLC and the personal guarantees are separate and should not be presented net. The LLC should be presented at estimated current value. The ASC has clear guidance on how and when to recognize liabilities arising from guarantees, ASC 460-10-55. Also, see ASC 274-10-55 for illustrative guidance for preparing PFS's(the example is not an insolvent individual).

Jimmer (talk|edits) said:

22 October 2012
Just to be clear, 274-10-55 shows "Contingent Liabilities" for the personal guarantee on the payments of the company loans. The amount of the outstanding debt is dislosed in the notes, but shows $0 on the face of the statements.

If so, that's essentially how I felt it should be reported - not as a liability on the statements, but rather just disclosed in the notes.

So, if I'm preparing no-note financials per the clients request, the personal guarantee wouldn't be shown anywhere, right?

Or am I missing something?

RoyDaleOne (talk|edits) said:

22 October 2012
Because the individuals are insolvent, I don't believe GAAP basis financial statements are called for. This may mean only changing your opinion on the statements, or presents the opportunity for a more meaningful presentation.

EmpireCPA (talk|edits) said:

22 October 2012
"Or am I missing something?"

Yes. I anticipated this line of thought which is why I pointed out above that the example does not relate to insolvency.

The liability exists based on the facts you provided. Recognition criteria for liabilities: probable and reasonably estimable. Based on my limited understanding of the facts, LLC presented on balance sheet at $0, liability for Guarantee of XYZ Debt $3MM. Footnote disclosure of nature of guarantee. A guarantee is a liability that has not met recognition criteria. Once it has, it is a liability.

EmpireCPA (talk|edits) said:

22 October 2012
RoyDaleOne, as far as I know, all personal financial statements assume a going concern. Insolvency does not call for modification of presentation or basis of accounting. In fact, GAAP PFS presentation follows pretty closely the liquidation basis of accounting.

I am not sure what would be more meaningful in this context other than indicating that a multi-million dollar liability exists. I can't think of a reader of the statements who would not think that it is more meaningful since the reader will most likely be a creditor or lawyer at this point. Let's not forget that OP indicated these were being presented pursuant to discovery in a lawsuit related to the debt in question.

Jimmer (talk|edits) said:

22 October 2012
Well thank you so much for your assistance. I was still showing the debt on the Investment- LLC line, but perhaps it should be zero as it is uncollectible, and the personal guarantees should kick in as I think you are suggesting.

Jimmer (talk|edits) said:

22 October 2012
I have searched high and low for language for a Personal Financial Statement Compilation report with no disclosures.

I'm to the point now, where I wonder if you can even prepare such a report, or if disclosures are always required for a PFS?

RoyDaleOne (talk|edits) said:

24 October 2012
From the archives, not sure if this is update.


We have compiled the accompanying statement of financial condition of XXXX as of September 30, xxxx in accordance with Statement on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The statement of financial condition is intended to present the assets of XXXX at estimated current values and the liabilities at estimated current amounts.

A compilation is limited to presenting in the form of financial statements, information that is the representation of the individual whose financial statement is presented. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

XXXX have elected to omit substantially all of the disclosures required by generally accepted accounting principles. If the omitted disclosures were included in the financial statement, they might influence the user's conclusions about the financial condition of XXXX. Accordingly, this financial statement is not designed for those who are not informed about such matters.

RoyDaleOne (talk|edits) said:

24 October 2012
EmpireCPA my comment was not intended to change the basis of accounting in the presentation of the financial statement, but, for the poster to consider some change in the accompanying opinion. A cover your butt type of paragraph.

Just as the poster mentioned the individual had no chance of paying the debt. I suggest that at least lip service to that fact should be somewhere in the financial statements.

EmpireCPA (talk|edits) said:

24 October 2012
Jimmer, you can issue such a report. It requires the standard omission paragraph. In addition, if you do not also disclose the estimated value basis for the statements, you must add a sentence to the first paragraph that says the statements are "intended" to present the assets and liabilities at estimated values.

RoyDaleOne (talk|edits) said:

24 October 2012
EmpireCPA I noticed you did not comment on my example report. Is it out of date?

Thanks.

EmpireCPA (talk|edits) said:

24 October 2012
Sorry about that. Yes, it is out of date. It lacks "we have not audited or reviewed..." and "xxx are responsible for the preparation....... designing, implementing and maintaining internal control..."

RoyDaleOne (talk|edits) said:

24 October 2012
"We have not audited or reviewed" I see.


"xxx are responsible for the preparation....... designing, implementing and maintaining internal control..."" For a personal financial statement.

RoyDaleOne (talk|edits) said:

24 October 2012
http://www.aicpa.org/interestareas/frc/compilation/downloadabledocuments/comp_and_review_guide_exhibit.pdf

RoyDaleOne (talk|edits) said:

24 October 2012
http://www.aicpa.org/research/standards/compilationreview/downloadabledocuments/ar-00080.pdf

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