1.2 Types of Transfers
1.2.1 General
ASC 860-10
Types of Transfers
05-6 Transfers of financial
assets take many forms. This guidance provides an
overview of the following types of transfers discussed
in this Topic:
- Securitizations
- Factoring
- Transfers of receivables with recourse
- Securities lending transactions
- Repurchase agreements
- Loan participations
- Banker’s acceptances.
As noted in ASC 860-10-05-6, transfers of financial assets take many forms. ASC
860 discusses seven types of transfers in more detail. The sections below
discuss these types of transfers as well as transfers of nonperforming loans.
ASC Master Glossary
Securitization
The process by which financial assets are transformed
into securities.
ASC 860-10
Securitizations
05-7 An
originator of a typical securitization (the transferor)
transfers a portfolio of financial assets to a
securitization entity, commonly a trust. Financial
assets such as mortgage loans, automobile loans, trade
receivables, credit card receivables, and other
revolving charge accounts are financial assets commonly
transferred in securitizations. Securitizations of
mortgage loans may include pools of single-family
residential mortgages or other types of real estate
mortgage loans, for example, multifamily residential
mortgages and commercial property mortgages.
Securitizations of loans secured by chattel mortgages on
automotive vehicles as well as other equipment
(including direct financing or sales-type leases) also
are common.
05-8
Beneficial interests in the securitization entity are
sold to investors and the proceeds are used to pay the
transferor for the transferred financial assets. Those
beneficial interests may comprise either a single class
having equity characteristics or multiple classes of
interests, some having debt characteristics and others
having equity characteristics. The cash collected from
the portfolio is distributed to the investors and others
as specified by the legal documents that established the
entity.
05-11
Securitizations of credit card and other receivable
portfolios usually involve a specified reinvestment
period (usually 18 to 36 months), during which the trust
will purchase additional credit card receivables
generated by the selected accounts. After the
reinvestment period, a period of liquidation occurs
during which the investors receive an allocated portion
of principal payments relating to receivables in the
trust. The liquidation method may vary depending on the
terms of the agreement and may be a participation method
(payout allocation rate may be fixed, preset, or
variable) or a controlled amortization method (payout
based on a predetermined schedule). Specific methods are
as follows:
- Fixed participation method
- Floating participation method
- Preset participation method.
05-12 Credit
card securitizations (and other types of
securitizations) may include a removal-of-accounts
provision that permits the seller, under certain
conditions and with trustee approval, to withdraw
receivables from the pool of securitized
receivables.
05-13 Many
securitization structures provide for a disproportionate
distribution of cash flows to various classes of
investors during the amortization period, which is
referred to as a turbo provision. For example, a turbo
provision might require the first $100 million of cash
received during the amortization period of the
securitization structure to be paid to one class of
investors before any cash is available for repayment to
other investors. Similarly, certain revolving-period
securitizations use what is referred to as a bullet
provision as a method of distributing cash to their
investors. Under a bullet provision, during a specified
period preceding liquidating distributions to investors,
cash proceeds from the underlying assets are reinvested
in short-term investments other than the underlying
revolving-period receivables. Those investments mature
or are otherwise liquidated to make a single bullet
payment to certain classes of investors.
Financial services entities that originate or purchase loans, as well as
commercial entities that sell goods or services on account, often finance those
loans and receivables by entering into securitization transactions. Because of
differences between securitizations and other types of transfers, the
considerations relevant to the determination of whether transfers involving
securitization entities meet the conditions for sale accounting also differ.
Examples of considerations that may be unique to securitization transactions
include the following:
- The transferor usually has one or more forms of continuing involvement in the securitization entity that holds the financial assets; therefore, the transferor must evaluate whether it is required to consolidate the securitization entity under ASC 810 — securitization entities often represent variable interest entities (VIEs). See Section 3.1.1.2 for further discussion of continuing involvement.
- Securitization transactions often involve transfers of financial assets to a BRSPE before those assets (or interests in those assets) are transferred to the securitization entity (also referred to as a “two-step” transaction); therefore, the transferor must evaluate the legal isolation condition in ASC 860-10-40-5(a), taking into account all the entities involved in the transaction. As part of this assessment, the transferor may need to evaluate whether the financial assets held by the securitization entity would be consolidated with the transferor in the event of the transferor’s bankruptcy or receivership. See Section 3.3.1.4 for more information.
- The securitization entity generally cannot pledge or exchange the financial assets it holds; therefore, the evaluation of the condition in ASC 860-10-40-5(b) focuses on the third-party beneficial interests issued by the securitization entity. See Section 3.4 for discussion of ASC 860-10-40-5(b).
In addition to assessing the accounting considerations, entities
transferring financial assets to securitization entities are often required to
comply with various laws and regulations related to their activities. For
example, such entities must meet certain risk retention requirements under the
Dodd-Frank Wall Street Reform and Consumer Protection Act. For more information
about securitization transactions, see Deloitte’s Securitization Accounting: 11th Edition.
1.2.2 Factoring
ASC 860-10
Factoring
05-14
Factoring arrangements are a means of discounting
accounts receivable on a nonrecourse, notification
basis. Accounts receivable in their entireties are sold
outright, usually to a transferee (the factor) that
assumes the full risk of collection, without recourse to
the transferor in the event of a loss. Debtors are
directed to send payments to the transferee.
The term “factoring” refers to various types of accounts receivable transfers and
may have different meanings in practice. ASC 860-10-05-14 describes factoring
arrangements that involve the sale of accounts receivable to a third party that
assumes the entire risk of collection but has no “recourse to the transferor in
the event of a loss.” In such transactions, it may be relatively easy to
conclude that the sale accounting conditions in ASC 860 are met if the
transferor has no continuing involvement. However, “factoring” transfers often
are more complex and involve various forms of the transferor’s continuing
involvement (e.g., servicing, guarantees, other forms of recourse). In these
situations, it becomes more difficult to evaluate the sale accounting conditions
in ASC 860. See Section 3.1.1.2 for further discussion of
continuing involvement. See Section 3.6.3 for additional
details about the factoring of receivables.
1.2.3 Transfers of Receivables With Recourse
ASC 860-10 — Glossary
Recourse
The right of a transferee of receivables to receive
payment from the transferor of those receivables for any
of the following:
- Failure of debtors to pay when due
- The effects of prepayments
- Adjustments resulting from defects in the eligibility of the transferred receivables.
ASC 860-10
Transfers of Receivables With Recourse
05-15 In a
transfer of an entire receivable, a group of entire
receivables, or a portion of an entire receivable with
recourse, the transferor provides the transferee with
full or limited recourse. The transferor is obligated
under the terms of the recourse provision to make
payments to the transferee or to repurchase receivables
sold under certain circumstances, typically for defaults
up to a specified percentage.
Entities that transfer receivables often provide recourse to the transferee. The
recourse may be in the form of a guarantee of the payments on the receivables or
a “holdback” of a portion of the purchase price by the transferee. Depending on
the nature of the provisions, the recourse provided may be a standard
representation and warranty. Although transfers of receivables with recourse may
meet the conditions in ASC 860-10 for sale accounting, the recourse provisions
must be considered in the derecognition analysis.
Entities that transfer receivables and provide recourse must consider how the
recourse may affect whether the legal isolation condition in ASC 860-10-40-5(a)
is met. See Section 3.3 for more information about legal
isolation. In addition, if the transferor meets the conditions for sale
accounting and is subsequently required to repurchase receivables that default,
the entity would need to rerecognize the previously sold receivables upon such
default (see Section 4.3 for more information). See also
Section 3.6.3 for further discussion of transfers of
receivables.
1.2.4 Repurchase Agreements and Securities Lending Transactions
ASC Master Glossary
Repurchase Agreement
An agreement under which the transferor (repo party)
transfers a financial asset to a transferee (repo
counterparty or reverse party) in exchange for cash and
concurrently agrees to reacquire that financial asset at
a future date for an amount equal to the cash exchanged
plus or minus a stipulated interest factor. Instead of
cash, other securities or letters of credit sometimes
are exchanged. Some repurchase agreements call for
repurchase of financial assets that need not be
identical to the financial assets transferred.
Repurchase Agreement Accounted for as a Collateralized
Borrowing
A repurchase agreement (repo) refers to a transaction in
which a seller-borrower of securities sells those
securities to a buyer-lender with an agreement to
repurchase them at a stated price plus interest at a
specified date or in specified circumstances. A
repurchase agreement accounted for as a collateralized
borrowing is a repo that does not qualify for sale
accounting under Topic 860. The payable under a
repurchase agreement accounted for as a collateralized
borrowing refers to the amount of the seller-borrower’s
obligation recognized for the future repurchase of the
securities from the buyer-lender. In certain industries,
the terminology is reversed; that is, entities in those
industries refer to this type of agreement as a reverse
repo.
Reverse Repurchase Agreement Accounted for as a
Collateralized Borrowing
A reverse repurchase agreement accounted for as a
collateralized borrowing (also known as a reverse repo)
refers to a transaction that is accounted for as a
collateralized lending in which a buyer-lender buys
securities with an agreement to resell them to the
seller-borrower at a stated price plus interest at a
specified date or in specified circumstances. The
receivable under a reverse repurchase agreement
accounted for as a collateralized borrowing refers to
the amount due from the seller-borrower for the
repurchase of the securities from the buyer-lender. In
certain industries, the terminology is reversed; that
is, entities in those industries refer to this type of
agreement as a repo.
ASC 860-10
Securities Lending Transactions
05-16
Securities lending transactions are initiated by
broker-dealers and other financial institutions that
need specific securities to cover a short sale or a
customer’s failure to deliver securities sold.
Securities custodians or other agents commonly carry out
securities lending activities on behalf of clients.
05-17
Transferees (borrowers) of securities generally are
required to provide collateral to the transferor
(lender) of securities, commonly cash but sometimes
other securities or standby letters of credit, with a
value slightly higher than that of the securities
borrowed. If the collateral is cash, the transferor
typically earns a return by investing that cash at rates
higher than the rate paid or rebated to the transferee.
If the collateral is other than cash, the transferor
typically receives a fee.
05-18 Because
of the protection of collateral (typically valued daily
and adjusted frequently for changes in the market price
of the securities transferred) and the short terms of
the transactions, most securities lending transactions
in themselves do not impose significant credit risks on
either party. Other risks arise from what the parties to
the transaction do with the assets they receive. For
example, investments made with cash collateral impose
market and credit risks on the transferor.
Repurchase Agreements
05-19
Government securities dealers, banks, other financial
institutions, and corporate investors commonly use
repurchase agreements to obtain or use short-term
funds.
05-20
Repurchase agreements can be effected in a variety of
ways. Some repurchase agreements are similar to
securities lending transactions in that the transferee
has the right to sell or repledge the securities to a
third party during the term of the repurchase agreement.
In other repurchase agreements, the transferee does not
have the right to sell or repledge the securities during
the term of the repurchase agreement. For example, in a
tri-party repurchase agreement, the transferor transfers
securities to an independent third-party custodian that
holds the securities during the term of the repurchase
agreement.
05-21 Many
repurchase agreements are for short terms, often
overnight, or have indefinite terms that allow either
party to terminate the arrangement on short notice.
Other repurchase agreements are for longer terms,
sometimes until the maturity of the transferred
financial asset (repo to maturity).
There are some similarities between securities lending transactions and
repurchase agreements, both of which represent securities financing
transactions. For example, in both types of transactions:
- One party generally transfers legal title to a security or basket of securities to another party for a limited time in exchange for the receipt of a legal interest in the collateral pledged as part of the transaction. Therefore, in both types of transactions, there is a lender and a borrower of the security.
- Fees are involved.
- An entity generally accounts for the transaction as a secured borrowing, though this may not always be the case.
There are also some key differences between securities lending transactions and
repurchase agreements. For example:
- The collateral in a repurchase agreement is generally a bond or other debt security, whereas the collateral in a securities lending transaction is generally an equity security.
- While securities lending may be used to raise cash, generally only repurchase agreements are used for this purpose. Therefore, while cash may not exchange hands in a securities lending transaction, it generally does exchange hands in a repurchase agreement. The accounting for secured borrowings differs significantly depending on whether cash exchanges hands.
See Sections 3.6.5 and 5.2.1 for more
information about repurchase agreements and securities lending transactions.
1.2.5 Loan Participations
ASC 860-10 — Glossary
Loan Participation
A transaction in which a single lender makes a large loan
to a borrower and subsequently transfers undivided
interests in the loan to groups of banks or other
entities.
Loan Syndication
A transaction in which several lenders share in lending
to a single borrower. Each lender loans a specific
amount to the borrower and has the right to repayment
from the borrower. It is common for groups of lenders to
jointly fund those loans when the amount borrowed is
greater than any one lender is willing to lend.
ASC 860-10
Loan Participation
05-22 In
certain industries, a typical customer’s borrowing needs
often exceed its bank’s legal lending limits. To
accommodate the customer, the bank may participate the
loan to other banks (that is, transfer under a
participation agreement a portion of the customer’s loan
to one or more participating banks).
05-23
Transfers by the originating lender may take the legal
form of either assignments or participations. The
transfers are usually on a nonrecourse basis, and the
transferor (originating lender) continues to service the
loan. The transferee (participating entity) may or may
not have the right to sell or transfer its participation
during the term of the loan, depending on the terms of
the participation agreement.
Loan participations differ from loan syndications. For loan participations,
entities must first determine whether the arrangement meets the definition of a
participating interest (see Section 3.2 for more
information). If the arrangement does not meet the definition of a participating
interest, the transferor and transferee must account for the transaction as a
secured borrowing. If the arrangement meets the definition of a participating
interest, an entity needs to perform a further evaluation to determine whether
the transaction meets the conditions for sale accounting. If, for example, the
transferee is prohibited from pledging or exchanging the interest received, the
condition in ASC 860-10-40-5(b) would not be met.
1.2.6 Banker’s Acceptances
ASC 860-10
Banker’s Acceptances
05-24
Banker’s acceptances provide a way for a bank to finance
a customer’s purchase of goods from a vendor for periods
usually not exceeding six months. Under an agreement
between the bank, the customer, and the vendor, the bank
agrees to pay the customer’s liability to the vendor
upon presentation of specified documents that provide
evidence of delivery and acceptance of the purchased
goods. The principal document is a draft or bill of
exchange drawn by the customer that the bank stamps to
signify its acceptance of the liability to make payment
on the draft on its due date.
05-25 Once
the bank accepts a draft, the customer is liable to
repay the bank at the time the draft matures. The bank
recognizes a receivable from the customer and a
liability for the acceptance it has issued to the
vendor. The accepted draft becomes a negotiable
financial instrument. The vendor typically sells the
accepted draft at a discount either to the accepting
bank or in the marketplace.
05-26 A risk
participation is a contract between the accepting bank
and a participating bank in which the participating bank
agrees, in exchange for a fee, to reimburse the
accepting bank in the event that the accepting bank’s
customer fails to honor its liability to the accepting
bank in connection with the banker’s acceptance. The
participating bank becomes a guarantor of the credit of
the accepting bank’s customer.
See Sections 2.3.4 and 3.6.7 for
discussion of the accounting for banker’s acceptances.