Transfer of debt obligations with and without legal release
Scenario 1
Entity A issues bonds that have a carrying amount and fair value of $1,000,000. A pays $1,000,000 to Entity B for B to assume responsibility for paying interest and principal on the bonds to the bondholders. The bondholders are informed that B has assumed responsibility for the debt. However, A is not legally released from the obligation to pay interest and principal by the bondholders. Accordingly, if B does not make payments when due, the bondholders may seek payment from A.
Scenario 2
Entity A issues bonds that have a carrying amount and fair value of $1,000,000. A pays $1,000,000 to Entity B for B to assume responsibility for paying interest and principal on the bonds to the bondholders. The bondholders are informed that B has assumed responsibility for the debt and legally release A from any further obligation under the debt. However, A enters into a guarantee arrangement whereby, if B does not make payments when due, the bondholders may seek payment from A.