The Financial Accounting Standards Board has finalized a new update to the Accounting Standards Codification to straighten out varying practices around how to account for obligations stemming from joint and several liability arrangements.

Joint and several liability can arise as a result of debt arrangements, other contractual obligations, settled litigation, and judicial rulings, establishing a liability that is shared by more than one party. In civil cases, for example, where two or more individuals or entities are found liable for damages, a company might become part of a joint and several liability settlement. In a contractual arrangement, a company and a related entity might share responsibility for performance and default. 

FASB's Accounting Standards Update No. 2013-04 provides guidance for the recognition, measurement and disclosure of obligations when companies become party to such liabilities where the total amount of the obligation is fixed at the financial reporting date. The guidance does not cover liabilities where the measurement is uncertain at the reporting date, nor does it cover obligations that are addressed within existing accounting guidance, FASB says.

FASB's Emerging Issues Task Force recommended the guidance because it noticed existing rules do not include specific guidance on accounting for such obligations, leading to differences in how companies have handled the accounting. Some entities follow guidance on the recording and extinguishment of liabilities and reason they must record the entire amount of the obligation. Other follow guidance on contingent liabilities, a heavily scrutinized area of accounting, and reason they can record something less than the total obligation, such as the amount the entity agrees to pay among the other parties to the liability.

To clear up the confusion, FASB says in the new guidance that companies should report the total amount of the liability that they are obligated to pay under the settlement arrangement, along with any additional amount the company might expect to pay on behalf of other parties to the liability. The guidance also spells out some disclosure requirements related to the nature and amount of the obligation and some other information about the obligations.

The guidance is effective for annual and interim reporting periods beginning after Dec. 15, 2013, so companies have until their 2013 financial statements to begin applying it.