A company's majority shareholder personally guarantees, at no charge, a bank loan taken out by the company during the year. No cash or other consideration changes hands between the shareholder and the company for the guarantee. Under ASC 850 (Related Party Disclosures), must this arrangement be disclosed in the notes to the financial statements?
- No, because ASC 850 disclosure is required only for related-party transactions that involve the transfer of cash or other assets
- No, because the guarantee benefits the company and therefore does not need to be disclosed regardless of amount
- Yes, because ASC 850 requires disclosure of related-party transactions, including their nature and dollar amounts, even where no consideration was exchanged or only nominal amounts were involved
- Yes, but only if the company's independent auditor determines the guarantee is individually material to the financial statements taken as a whole
Why C? And why not the others?
Correct answer: C. Yes, because ASC 850 requires disclosure of related-party transactions, including their nature and dollar amounts, even where no consideration was exchanged or only nominal amounts were involved
ASC 850 requires disclosure of material related-party transactions, describing the nature of the relationship, a description of the transactions for each period presented, and the dollar amounts of the transactions, and it explicitly extends this requirement to transactions for which no amounts or only nominal amounts were ascribed, so an at-no-charge personal guarantee from a majority shareholder must still be described even though nothing changed hands. The option limiting disclosure to transactions involving cash or asset transfers is wrong because ASC 850 was written specifically to capture arrangements like free guarantees or rent-free use of property that would otherwise escape disclosure if only transactions with consideration counted. The option arguing that a beneficial arrangement need not be disclosed is wrong because the standard's disclosure objective is transparency about the relationship and potential influence, not a judgment about whether the arrangement helped or hurt the company. The option conditioning disclosure on the auditor's own materiality determination is wrong because the disclosure obligation belongs to management in preparing the financial statements under ASC 850, not to the auditor, and the standard does not make disclosure contingent on an auditor's independent materiality sign-off.
Source: FASB Accounting Standards Codification: ASC 850-10, Related Party Disclosures