Chapter 3 — Accounting for Transfers of Financial Assets

3.3 Legal Isolation of Transferred Financial Assets

3.3.1 General

3.3.1.1 Overview of Legal Isolation Condition

ASC 860-10

Conditions for a Sale of Financial Assets

40-5 A transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the transferor surrenders control over those financial assets shall be accounted for as a sale if and only if all of the following conditions are met:

Isolation of transferred financial assets. The transferred financial assets have been isolated from the transferor — put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. Transferred financial assets are isolated in bankruptcy or other receivership only if the transferred financial assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor or any of its consolidated affiliates included in the financial statements being presented. For multiple step transfers, a bankruptcy-remote entity is not considered a consolidated affiliate for purposes of performing the isolation analysis. Notwithstanding the isolation analysis, each entity involved in the transfer is subject to the applicable guidance on whether it shall be consolidated (see paragraphs 860-10-40-7 through 40-14 and the guidance beginning in paragraph 860-10-55-18). A set-off right is not an impediment to meeting the isolation condition. . . .

Isolation of Transferred Assets

40-7 The guidance in the following paragraphs and the related implementation guidance beginning in paragraph 860-10-55-18 applies to transfers by all entities, including institutions for which the Federal Deposit Insurance Corporation (FDIC) would be the receiver.

40-8 Derecognition of transferred financial assets is appropriate only if the available evidence provides reasonable assurance that the transferred financial assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor or any of its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented and its creditors (see paragraph 860-10-55-23(c)).

40-9 The nature and extent of supporting evidence required for an assertion in financial statements that transferred financial assets have been isolated — put presumptively beyond the reach of the transferor, any of its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors, either by a single transaction or a series of transactions taken as a whole — depend on the facts and circumstances.

40-10 All available evidence that either supports or questions an assertion shall be considered, including whether the contract or circumstances permit the transferor to revoke the transfer. It also may include consideration of the legal consequences of the transfer in the jurisdiction in which bankruptcy or other receivership would take place, including all of the following:

Whether a transfer of financial assets would likely be deemed a true sale at law (see paragraph 860-10-55-18A) or otherwise isolated (see paragraph 860-10-55-18C)
Whether the transferor is affiliated with the transferee
Other factors pertinent under applicable law.

40-11 The requirement of paragraph 860-10-40-5(a) that transferred financial assets be isolated focuses on whether transferred financial assets would be isolated from the transferor in the event of bankruptcy or other receivership regardless of how remote or probable bankruptcy or other receivership is at the date of transfer. That is, the requirement would not be satisfied simply because the likelihood of bankruptcy of the transferor is determined to be remote.

40-12 A transferor’s power to require the return of the transferred financial assets arising solely from a contract with the transferee, for example, a call option or removal-of-accounts provision, would not necessarily preclude a conclusion that transferred financial assets have been isolated from the transferor. However, such a power might preclude sale treatment if through it the transferor maintains effective control over the transferred financial assets. Some common financial transactions, for example, typical repurchase agreements and securities lending transactions, may isolate transferred financial assets from the transferor, although they may not meet the other conditions for surrender of control (see paragraph 860-10-40-5).

40-13 Whether securitizations isolate transferred financial assets may depend on such factors as whether the securitization is accomplished in one-step or multiple-step transfers. That is, the condition can be satisfied either by a single transaction or by a series of transactions considered as a whole. A securitization carried out in one transfer or a series of transfers may or may not isolate the transferred financial assets beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors. Whether it does depends on the structure of the securitization transaction taken as a whole, considering such factors as the type and extent of further involvement in arrangements to protect investors from credit, interest rate, and other risks, the availability of other financial assets, and the powers of bankruptcy courts or other receivers.

40-14 Paragraphs 860-10-55-18 through 55-23 clarify the requirements for transfers by entities subject to the U.S. Bankruptcy Code to meet the condition in paragraph 860-10-40-5(a) that the transferred financial assets have been put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy. Paragraphs 860-10-55-24 through 55-25 provide related guidance for entities not subject to the U.S. Bankruptcy Code. The discussion in paragraphs 860-10-55-18 through 55-25 relates only to the isolation condition in paragraph 860-10-40-5(a). The conditions in paragraph 860-10-40-5(b) through (c) also shall be considered to determine whether a transferor has surrendered control over the transferred financial assets.

Isolation of Transferred Financial Assets

55-24B Financial assets transferred by an entity subject to possible receivership by the FDIC are isolated from the transferor if the FDIC or another creditor either cannot require return of the transferred financial assets or can only require return in receivership, after a default, and in exchange for payment of, at a minimum, principal and interest earned (at the contractual yield) to the date investors are paid.

55-25 Conversely, financial assets transferred by an entity shall not be considered isolated from the transferor if circumstances can arise under which the transferor can require their return, but only in exchange for payment of principal and interest earned (at the contractual yield) to the date investors are paid, unless the transferor’s power to require the return of the transferred financial assets arises solely from a contract with the transferee. A noncontractual power to require the return of transferred assets is inconsistent with the limitations in paragraph 860-10-40-5(a) that, to be accounted for as having been sold, transferred financial assets shall be isolated from the transferor. That is the circumstance even if the noncontractual power appears unlikely to be exercised or is dependent on the uncertain future actions of other entities (for example, insufficiency of collections on underlying transferred financial assets or determinations by court of law). Under that guidance, a single-step securitization commonly used by financial institutions subject to receivership by the FDIC and sometimes used by other entities is likely not to be judged as having isolated the assets. One reason for that is because it would be difficult to obtain reasonable assurance that the transferor would be unable to recover the transferred financial assets under the equitable right of redemption available to secured debtors, after default, under U.S. law.

The isolation condition in ASC 860-10-40-5(a) addresses whether a transfer would be legally treated as a sale if the transferor enters bankruptcy or receivership, regardless of how remote it is that such a situation would occur (i.e., the transferred financial assets must be isolated even if the likelihood that the transferor would enter bankruptcy or receivership is remote). For this condition to be met, there must be reasonable assurance that the transferred financial assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor and its consolidated affiliates included in the financial statements being presented (excluding BRSPEs) and its creditors.16 This is a legal determination that depends on the facts and circumstances. Matters for an entity to consider in determining whether the legal isolation condition is met include the following:

Whether the contract or circumstances permit the transferor or any of its consolidated affiliates included in the financial statements being presented to revoke the transfer.17
The kind of bankruptcy or receivership into which a transferor (or any of its consolidated affiliates included in the financial statements being presented) or a SPE might be placed.
Whether a transfer of financial assets would be deemed a true sale at law.
Whether the transferor or any of its consolidated affiliates included in the financial statements being presented are affiliated with the transferee.
Other factors pertinent under applicable insolvency laws or procedures.

Because the isolation condition involves a legal evaluation, individuals qualified to practice bankruptcy law, rather than accountants, must conclude that this condition is met. Legal professionals must reach a conclusion about both (1) the bankruptcy laws or receivership authority that would apply to the transfer, which may depend on the nature of the entities involved in the transfer, the terms of the transfer, and the jurisdiction in which bankruptcy or receivership would occur (i.e., which laws apply to the transfer),18 and (2) how the relevant laws would be applied to the particular terms of the transfer (i.e., the terms and conditions of relevant agreements that govern the transfer). See Section 3.3.1.3 for discussion of the need for legal opinions to support the legal isolation condition (i.e., true sale opinions and, in certain circumstances, nonconsolidation opinions).

ASC 860-10-40-9 indicates that the nature and extent of the evidence supporting an assertion that the transferred financial assets meet the legal isolation condition depend on the facts and circumstances. In accordance with ASC 860-10-40-10, all available evidence that either supports or questions the assertion must be considered. Thus, all arrangements entered into contemporaneously with, or in contemplation of, the transfer must be taken into account. ASC 860-10-40-12 and ASC 860-10-40-14 acknowledge that some provisions included in transfers that may result in the return of the transferred financial assets to the transferor (e.g., call or put options) may not prevent the transfer from meeting the condition in ASC 860-10-40-5(a) but could still preclude the transfer from being accounted for as a sale. In other words, some transfers meet the legal isolation condition but fail to meet one or both of the remaining two conditions in ASC 860-10-40-5. Thus, entities cannot conclude that sale accounting is appropriate solely on the basis that the transfer would legally be considered a sale of financial assets.

ASC 860-10-40-13 discusses considerations that are relevant to securitization transactions. Entities must determine whether transferred financial assets in these transactions can be isolated in one step (i.e., a single transaction) or whether a two-step transaction structure involving a series of transactions considered as a whole is necessary for the legal isolation condition to be met. Two-step transfers involve BRSPEs. See Section 3.3.1.4 for further discussion of securitization transactions involving multiple entities.

ASC 860-10-55-18A through 55-25A contain implementation guidance addressing the isolation condition. This guidance applies to transfers by all entities, including financial institutions for which the FDIC would be the receiver. The sections below discuss this additional implementation guidance.

3.3.1.2 Identification of Relevant Bankruptcy Laws and Receivership Authorities

ASC 860-10

Isolation of Transferred Financial Assets

55-18C For entities that are subject to other possible bankruptcy, conservatorship, or other receivership procedures (for example, banks subject to receivership by the Federal Deposit Insurance Corporation [FDIC]) in the United States or other jurisdictions, judgments about whether transferred financial assets have been isolated shall be made in relation to the powers of bankruptcy courts or trustees, conservators, or receivers in those jurisdictions.

55-24 The powers of receivers for entities not subject to the U.S. Bankruptcy Code (for example, banks subject to receivership by the Federal Deposit Insurance Corporation [FDIC]) vary considerably, and therefore some receivers may be able to reach financial assets transferred under a particular arrangement and others may not. A securitization may isolate transferred financial assets from a transferor subject to such a receiver and its creditors even though it is accomplished by only one transfer directly to a securitization entity that issues beneficial interests to investors and the transferor provides credit or yield protection. For entities that are subject to other possible bankruptcy, conservatorship, or other receivership procedures in the United States or other jurisdictions, judgments about whether transferred financial assets have been isolated need to be made in relation to the powers of bankruptcy courts or trustees, conservators, or receivers in those jurisdictions.

55-24A Depending on the facts and circumstances, transferred financial assets can be isolated from the transferor if the Federal Deposit Insurance Corporation (FDIC) would be the receiver should the transferor fail. In July 2000, the FDIC adopted a final rule (subsequently amended), Treatment by the Federal Deposit Insurance Corporation as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection with a Securitization or Participation. The final amended rule modifies the FDIC’s receivership powers so that, subject to certain conditions, it shall not recover, reclaim, or recharacterize as property of the institution or the receivership any financial assets transferred by an insured depository institution that meet all conditions for sale accounting treatment under GAAP, other than the legal isolation condition in connection with a securitization or participation.

55-25A For entities that are subject to possible receivership under jurisdictions other than the FDIC or the U.S. Bankruptcy Code, whether assets transferred by an entity can be considered isolated from the transferor depends on the circumstances that apply to those types of entities. As discussed in paragraph 860-10-55-24, for entities that are subject to other possible bankruptcy, conservatorship, or other receivership procedures in the United States or other jurisdictions, judgments about whether transferred financial assets have been isolated need to be made in relation to the powers of bankruptcy courts or trustees, conservators, or receivers in those jurisdictions. The same sorts of judgments may need to be made in relation to powers of the transferor or its creditors.

Many entities in the United States are subject to the requirements of the U.S. Bankruptcy Code. However, some U.S. entities are subject to other receivership procedures (e.g., banks subject to receivership by the FDIC). Entities that are domiciled outside the United States will be subject to the applicable laws in their jurisdiction. ASC 860-10-55-18C and ASC 860-10-55-25A emphasize the need for entities to appropriately consider legal isolation in the context of the powers of the court, trustee, or receiver that would oversee the transferor’s insolvency. This is very important because the exact same transaction may meet the legal isolation condition according to the insolvency laws or procedures in one jurisdiction and not meet the legal isolation according to the insolvency laws or procedures in another jurisdiction.

ASC 860-10-55-24 through 55-25 provide additional guidance that applies to entities subject to FDIC receivership. ASC 860-10-55-24B indicates that transferred financial assets are considered isolated if either (1) the FDIC or another creditor cannot require their return or (2) the FDIC or another creditor “can only require [their] return in receivership, after a default, and in exchange for payment of, at a minimum, principal and interest earned (at the contractual yield) to the date investors are paid.” However, ASC 860-10-55-25 indicates that if the transferor can require return of the transferred financial assets, “but only in exchange for payment of principal and interest earned (at the contractual yield) to the date investors are paid,” the transfer will not meet the legal isolation condition “unless the transferor’s power to require the return of the transferred financial assets arises solely from a contract with the transferee.”19 ASC 860-10-55-25 further notes that “even if the noncontractual power appears unlikely to be exercised or is dependent on the uncertain future actions of other entities (for example, insufficiency of collections on underlying transferred financial assets or determinations by court of law),” such power is “inconsistent with the limitations in paragraph 860-10-40-5(a) that, to be accounted for as having been sold, transferred financial assets shall be isolated from the transferor.” Such redemption rights would preclude all entities from meeting the isolation condition in ASC 860-10-40-5(a).

Connecting the Dots

The guidance in ASC 860-10-55-24B does not apply to transfers by entities subject to the U.S. Bankruptcy Code. ASC 860-10 is clear that for entities subject to the U.S. Bankruptcy Code to meet the condition in ASC 860-10-40-5(a), the transferred financial assets must be put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy. The FASB did not object to this distinction given the unique nature of the possible receivership of FDIC-insured financial institutions.

Before the issuance of ASU 2009-16, the FDIC had a legal isolation safe harbor for financial asset transfers to QSPEs. This safe harbor clarified that the FDIC would not exercise its statutory power to disaffirm or repudiate contracts to reclaim financial assets transferred by an insured depository institution in a securitization transaction upon the receivership of the institution provided that certain conditions were met, including the sale accounting conditions in FASB Statement 140. Transferors relied on this safe harbor in determining that the legal isolation condition was met. In response to the amendments made by ASU 2009-16, including the elimination of QSPEs, the FDIC adopted an interim final rule in November 2009 and a final rule in September 2010, both of which continued to allow for the legal isolation safe harbor for financial assets transferred by insured depository institutions. The final rule established two types of safe harbors addressing securitizations and participations depending on whether those transfers are accounted for as sales or secured borrowings under ASC 860-10. It also established the conditions necessary for a securitization to qualify for either safe harbor. The final rule conformed with the risk retention requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

See Section 3.3.1.3 for discussion of legal opinions obtained in transfers by insured depository institutions subject to FDIC receivership and Section 3.3.1.4 for guidance on the use of two-step transactions by transferors that are subject to FDIC receivership.

3.3.1.3 Legal Opinions

ASC 860-10

Isolation of Transferred Financial Assets

55-18A In the context of U.S. bankruptcy laws, a true sale opinion from an attorney is often required to support a conclusion that transferred financial assets are isolated from the transferor, any of its consolidated affiliates included in the financial statements being presented, and its creditors. In addition, a nonconsolidation opinion is often required if the transfer is to an affiliated entity. In the context of U.S. bankruptcy laws:

A true sale opinion is an attorney’s conclusion that the transferred financial assets have been sold and are beyond the reach of the transferor’s creditors and that a court would conclude that the transferred financial assets would not be included in the transferor’s bankruptcy estate.
A nonconsolidation opinion is an attorney’s conclusion that a court would recognize that an entity holding the transferred financial assets exists separately from the transferor. Additionally, a nonconsolidation opinion is an attorney’s conclusion that a court would not order the substantive consolidation of the assets and liabilities of the entity holding the transferred financial assets and the assets and liabilities of the transferor (and its consolidated affiliates included in the financial statements being presented) in the event of the transferor’s bankruptcy or receivership.

55-18B A legal opinion may not be required if a transferor has a reasonable basis to conclude that the appropriate legal opinion(s) would be given if requested. For example, the transferor might reach a conclusion without consulting an attorney if either of the following conditions exists:

The transfer is a routine transfer of financial assets that does not result in any continuing involvement by the transferor.
The transferor had experience with other transfers with similar facts and circumstances under the same applicable laws and regulations.

The terms “true sale opinion” and “nonconsolidation opinion” are defined above in ASC 860-10-55-18A.

Unless the transferor has no continuing involvement in transferred financial assets, it is generally required to obtain a true sale opinion from a qualified attorney that practices bankruptcy law to determine that the legal isolation condition is met.20 In reaching an opinion, an attorney will generally consider such matters as the following (this list is not all-inclusive):

The extent of recourse provided by the transferor, which affects which party bears credit or other market risks related to the transferred financial asset (e.g., guarantees of the transferor, holdbacks of purchase price for credit losses).
Whether the transfer can be revoked by either party.
Whether the transferor has relinquished the benefits of ownership of the transferred asset (e.g., whether the buyer is obligated to transfer to the seller excess returns on the financial asset or whether the seller can repurchase the asset).
The intentions of the parties to the transaction.
The consideration exchanged (i.e., whether fair consideration was paid by the transferee).

The extent of recourse is often the most important factor in this evaluation. Extensive recourse may result in the inability to achieve legal isolation (see Example 3-11). However, standard representations and warranties would not. The extent of recourse that may exist in a true sale at law will depend on the insolvency laws and procedures that apply to the transfer, which depend on the nature of the entity and the jurisdiction that governs the transfer.

A true sale opinion may support that transferred financial assets have been legally isolated from the transferor. However, if the transferee may be substantively consolidated into the transferor’s estate in the event of its bankruptcy or receivership, the transfer of financial assets will not meet the legal isolation condition. Therefore, when a transfer of financial assets involves a transaction with a consolidated affiliate, in addition to obtaining a true sale opinion, transferors must consider the need to obtain a nonconsolidation opinion to support the legal isolation condition in ASC 860-10-40-5(a).

Substantive consolidation involves the treatment of a group of affiliated entities as if they are a single entity in a bankruptcy proceeding and may apply to entities within an affiliated group that have not even filed for bankruptcy. Substantive consolidation is a concept that preceded the enactment of the U.S. Bankruptcy Code in 1978. Although the U.S. Bankruptcy Code does not expressly authorize substantive consolidation, it does recognize that a Chapter 11 plan may provide for the consolidation of a “debtor with one or more persons.” Courts find authority for substantive consolidation in the broad equitable powers conferred in Section 105(a) of the U.S. Bankruptcy Code, which authorizes the court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions” of the code. The application of substantive consolidation is based on case law.

The assets and liabilities of separate entities are generally not consolidated in bankruptcy proceedings because bankruptcy courts invoke substantive consolidation sparingly. While courts use different standards to determine the propriety of substantive consolidation, an analysis of the impact of such consolidation on creditors is common in such determinations. Creditors must present sufficient evidence to convince a bankruptcy court to invoke substantive consolidation. A court will not order such consolidation unless it believes that doing so will benefit the creditors of all the entities combined and will not unfairly prejudice creditors of any individual entity.

In securitization transactions, there is a risk that the financial assets transferred to the securitization entity would be consolidated with the assets of the transferor if it became insolvent. If the transferor and the securitization entity were consolidated, the third-party beneficial interest holders would be creditors of the combined entity (as opposed to being creditors of just the securitization entity), and the transferor’s creditors could obtain cash flows from the financial assets owned by the securitization entity. In two-step securitization transactions, since the BRSPE is an affiliate of the transferor, an entity is required to obtain a nonconsolidation opinion in addition to a true sale opinion to meet the legal isolation condition in ASC 860-10-40-5(a). A nonconsolidation opinion is generally not required for transfers that do not involve affiliated entities and may be unnecessary for securitization transactions that can qualify for sale accounting without the involvement of affiliated entities. See Example 3-9 for an illustration.

PCAOB AU Section 9336 (also AICPA AI 11) discusses the requirements of auditors to obtain sufficient audit evidence to support the legal isolation condition in ASC 860-10-40-5(a). Specifically, this AU section addresses when auditors need to obtain legal opinions, as well as the procedures that must be applied when a true sale opinion or nonconsolidation opinion is used as evidence to support the legal isolation condition. Under AU Section 9336, the auditor must evaluate the qualifications of attorneys that provide legal opinions to determine whether they are experts in bankruptcy law or other receivership authority (e.g., the powers of the FDIC). Both the transferor and the auditor must be specifically authorized to use a legal opinion as evidence to support the legal isolation condition. While AU Section 9336 addresses the auditor’s procedures, it is also useful guidance for management to consider in determining whether transfers meet the legal isolation requirement.

Connecting the Dots

Paragraph 7 of AU Section 9336 states:

If a legal opinion is used as evidence to support the accounting conclusion related to multiple transfers under a single structure, and such transfers occur over an extended period of time under that structure, the auditor should evaluate the need for management to obtain periodic updates of that opinion to confirm that there have been no subsequent changes in relevant law or applicable regulations that may change the applicability of the previous opinion to such transfers. The auditor also should evaluate the need for management to obtain periodic updates of an opinion to confirm that there have been no subsequent changes in relevant law or applicable regulations that may affect the conclusions reached in the previous opinion in the case of other transfers (see FASB ASC 860-10-40-41 and FASB ASC 860-20-25).

The legal isolation condition applies as of the transfer date and continuously throughout the remaining life of the transferred financial asset. In accordance with paragraph 7 of AU Section 9336, management and auditors should consider the need to obtain updates to legal opinions to confirm that there have been no subsequent changes in laws or regulations that affect prior conclusions.

AU Section 9336 contains specific guidance on legal opinions in transfers by financial institutions subject to FDIC receivership. AU Section 9336 indicates that two forms of legal opinions are acceptable for meeting the legal isolation requirement in ASC 860-10-40-5(a): either (1) a true sale opinion similar to opinions provided to non-FDIC-insured transferors or (2) an opinion addressing isolation both before and after the appointment of the FDIC as a receiver. When an FDIC-insured entity transfers financial assets in a two-step securitization transaction, a nonconsolidation opinion must also be obtained. The nature of the opinions necessary to ensure reasonable assurance that the legal isolation condition is met is a legal determination.

3.3.1.4 Securitization Transactions

3.3.1.4.1 General

ASC 860-10

Isolation of Transferred Assets

Isolation of Transferred Financial Assets

55-19 In certain securitizations, a corporation that, if it failed, would be subject to the U.S. Bankruptcy Code transfers financial assets to a securitization entity in exchange for cash. The entity raises that cash by issuing to investors beneficial interests that pass through all cash received from the financial assets, and the transferor has no further involvement with the trust or the transferred financial assets. Those securitizations generally would be judged as having isolated the assets because, in the absence of any continuing involvement there would be reasonable assurance that the transfer would be found to be a true sale at law that places the assets beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors, even in bankruptcy or other receivership.

55-20 In other securitizations, a similar corporation transfers financial assets to a securitization entity in exchange for cash and beneficial interests in the transferred financial assets. That entity raises the cash by issuing to investors commercial paper that gives them a senior beneficial interest in cash received from the financial assets. The beneficial interests obtained by the transferring corporation represent a junior interest to be reduced by any credit losses on the financial assets in the entity. The senior beneficial interests (commercial paper) are highly rated by credit rating agencies only if both the credit enhancement from the junior interest is sufficient and the transferor is highly rated.

55-21 Depending on facts and circumstances, those single-step securitizations often would be judged in the United States as not having isolated the financial assets, because the nature of the continuing involvement may make it difficult to obtain reasonable assurance that the transfer would be found to be a true sale at law that places the financial assets beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors in U.S. bankruptcy (see paragraph 860-10-55-46). If the transferor fell into bankruptcy and the transfer was found not to be a true sale at law, investors in the transferred financial assets might be subjected to an automatic stay that would delay payments due them, and they might have to share in bankruptcy expenses and suffer further losses if the transfer was recharacterized as a secured loan.

55-22 Other securitizations use multiple transfers intended to isolate transferred financial assets beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors, even in bankruptcy. The series of transactions in a typical two-tier structure taken as a whole may satisfy the isolation test because the design of the structure achieves isolation. The two-step securitizations, taken as a whole, generally would be judged under present U.S. law as having isolated the financial assets beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors, even in bankruptcy or other receivership. However, each entity involved in a transfer should be evaluated under the consolidation guidance in Topic 810. Accordingly, a transferor could be required to consolidate the trust or other legal vehicle used in the second step of the securitization, notwithstanding the isolation analysis of the transfer.

55-23 For example, two-step structures involve the following:

First, the corporation transfers a group of financial assets to a special-purpose corporation that, although wholly owned, is so designed that the possibility is remote that the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, or its creditors could reclaim the financial assets. This first transfer is designed to be judged to be a true sale at law, in part because the transferor does not provide excessive credit or yield protection to the special-purpose corporation, and the transferred financial assets are likely to be judged beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, or the transferor’s creditors even in bankruptcy or other receivership.
Second, the special-purpose corporation transfers a group of financial assets to a trust or other legal vehicle with a sufficient increase in the credit or yield protection on the second transfer (provided by a transferor’s junior beneficial interest or other means) to merit the high credit rating sought by third-party investors who buy senior beneficial interests in the trust. Because of that aspect of its design, that second transfer might not be judged to be a true sale at law and, thus, the transferred financial assets could at least in theory be reached by a bankruptcy trustee for the special-purpose corporation.
However, the special-purpose corporation is designed to make remote the possibility that it would enter bankruptcy, either by itself or by substantive consolidation into a bankruptcy of its parent should that occur. For example, its charter forbids it from undertaking any other business or incurring any liabilities, so that there can be no creditors to petition to place it in bankruptcy. Furthermore, its dedication to a single purpose is intended to make it extremely unlikely, even if it somehow entered bankruptcy, that a receiver under the U.S. Bankruptcy Code could reclaim the transferred financial assets because it has no other assets to substitute for the transferred financial assets.

In a single-step securitization transaction, an entity transfers financial assets directly to a securitization trust or other legal vehicle in exchange for cash. A two-step securitization transaction involves the following:

Step 1 — An entity transfers financial assets to a wholly owned BRSPE, which is designed to make it remote that the transferor or creditors could reclaim the transferred financial assets.
Step 2 — The BRSPE transfers the financial assets received to a trust or other legal vehicle with a sufficient increase in the credit and yield protection to merit the high credit rating sought by investors. This entity sells beneficial interests (which may include classes of varying seniority) to third parties, the transferor, or both.

3.3.1.4.2 Single-Step Securitization Transactions

In the United States, a single-step securitization transaction generally does not meet the legal isolation condition unless the transferor (and its consolidated affiliates included in the financial statements being presented and its agents) has no continuing involvement in the transferred financial assets. If the transferor (or its consolidated affiliates included in the financial statements being presented or its agents) has continuing involvement with the transferred financial assets, a two-step securitization is generally required for entities subject to the U.S. Bankruptcy Code or the receivership powers of the FDIC to meet the legal isolation condition.

There may be reasonable assurance that the following transfer would be judged a true sale at law:21

An entity transfers entire financial assets to a securitization entity.
The securitization entity issues beneficial interests in those transferred financial assets only to third parties for cash, which is transferred to the transferor as the proceeds from the sale of financial assets.
The transferor has no continuing involvement in the transferred financial assets (i.e., the transferor does not service the transferred financial assets or retain any beneficial interests in the transferred financial assets, and there are no rights of redemption that the transferor, creditors, or a trustee in bankruptcy may exercise to reclaim the transferred financial assets by paying principal and interest earned at the contractual rate to the date investors are paid22). As discussed in Section 3.1.1.2, the transferor may provide standard representations and warranties regarding the transferred financial assets.

ASC 860-10 contains some guidance on whether single-step securitization transactions will meet the legal isolation condition. For example, ASC 860-10-55-21 and ASC 860-10-55-25 indicate that single-step securitization transactions subject to U.S. bankruptcy laws or FDIC receivership will most likely not meet the legal isolation requirement. While accountants should consider whether a single-step or two-step securitization transaction is necessary to meet the legal isolation condition in ASC 860-10-40-5(a), this determination is ultimately a legal one. Therefore, entities should consult with legal advisers to determine the structure needed for a transfer of financial assets to a securitization entity to meet the legal isolation condition. Note that whether a single-step securitization transaction meets the legal isolation condition in jurisdictions outside the United States will depend on the relevant insolvency laws of the foreign jurisdiction.

3.3.1.4.3 Two-Step Securitization Transactions

In a two-step securitization, the first transfer is designed to be judged a true sale at law, in part because it does not provide excessive credit or yield protection to the BRSPE. The second transfer may or may not be judged a true sale at law and, in theory, the financial assets could be reached (i.e., obtained) by a bankruptcy trustee or receiver for the BRSPE. However, the BRSPE’s charter forbids it from undertaking any other business or incurring any liabilities, thus removing concern about its bankruptcy risk. The charter of each BRSPE must also require that the entity be maintained separately from its parent (i.e., the transferor) to avoid the risk that the BRSPE’s assets would be substantively consolidated with the parent’s assets in an insolvency proceeding involving the parent.

In a two-step transaction, a BRSPE exists in the first transfer solely to make it remote that the transferor or creditors could reclaim the transferred financial assets (i.e., to make it remote that the BRSPE would enter bankruptcy or receivership). Both a true sale opinion and a nonconsolidation opinion are obtained to support the legal isolation condition for the transfer of financial assets to the BRSPE. The second step in a two-step transaction occurs when the BRSPE transfers the financial assets to the securitization entity. In this second step, additional credit protection is often provided by issuing subordinated and senior beneficial interests in the transferred financial assets. Because of the credit protection provided, this transfer may not be considered a true sale at law because a bankruptcy trustee or receiver for the BRSPE could, in theory, reach the transferred financial assets. However, because the transaction is designed to make it remote that the BRSPE would enter bankruptcy, the inclusion of the first step in the two transactions provides reasonable assurance that the legal isolation condition in ASC 860-10-40-5(a) is met.

The BRSPE structure is often very important to an attorney’s analysis. Though not determinative, the accounting conclusion regarding whether BRSPEs should be consolidated for financial statement reporting purposes may factor into an attorney’s reasoning about whether the financial assets have been isolated from a transferor’s creditors. It is acceptable, and typical, for the transferor to consolidate the BRSPE used in the first step for financial reporting purposes and still receive the necessary assurance regarding legal isolation in a true sale opinion.23 While legal isolation must be determined from the perspective of the transferor and all of its consolidated affiliates included in the financial statements being presented, under ASC 860-10-40-5(a), BRSPEs that have no business purpose other than to achieve legal isolation are not considered consolidated affiliates.24

Connecting the Dots

The following is a summary of considerations relevant to meeting the legal isolation condition in ASC 860-10-40-5(a) and other sale accounting conditions in ASC 860-10-40-5 for securitization transactions:

While accountants should consider whether a single-step or two-step securitization transaction is necessary to meet the legal isolation condition in ASC 860-10-40-5(a), this determination is ultimately a legal one.
For entities that are subject to other possible bankruptcy or receivership procedures (e.g., banks subject to receivership by the FDIC) in the United States or other jurisdictions, judgments about whether transferred financial assets have been isolated need to be applied in relation to the powers of bankruptcy courts or trustees or receivers in those jurisdictions.
In two-step securitization transactions in the United States:
- The transferor obtains reasonable assurance of legal isolation from the first step in the structure by obtaining a true sale opinion for the transfer of the financial assets to the BRSPE and a nonconsolidation opinion since the BRSPE is an affiliate of the transferor. The transferor’s conclusion that it must consolidate the BRSPE for accounting purposes does not itself prevent accounting for the transfer of the financial assets as a sale.
- The second step (i.e., the transfer of financial assets from the BRSPE to the securitization entity) will often not be viewed as a true sale at law. However, this evaluation is unnecessary. The fact that the transferor consolidates the BRSPE for accounting purposes and that a true sale does not exist for the transfer between the BRSPE and the securitization entity does not, itself, prevent accounting for the transferred financial assets as a sale. The transferor need not obtain a true sale opinion for this second transfer. The transferor also generally does not need a nonconsolidation opinion for this transfer. However, all terms and conditions related to both steps need to be provided to attorneys so that they have all relevant information in reaching an opinion on the first step of the transaction. By having all relevant information, the legal experts will also be able to evaluate the impact, if any, on the legal isolation of the transferred financial assets when the securitization entity is judged to be an affiliate of the transferor (or its consolidated affiliates included in the financial statements being presented) for legal purposes. A nonconsolidation opinion could be needed for the second transfer if the transferor and securitization entity are somehow considered affiliates under law.
- Although a true sale opinion is not needed for the second transfer, for sale accounting to be achieved, (1) the BRSPE must transfer entire financial assets or participating interests to the securitization entity; (2) the transferor must conclude that neither it, nor its consolidated affiliates included in the financial statements being presented, is required to consolidate the securitization entity under ASC 810-10; and (3) the conditions in ASC 860-10-40-5(b) and (c) must be met.

See Section 3.6.3.2.2 for further discussion of two-step securitization transactions involving trade receivables.

3.3.1.4.4 Set-Off Rights

A set-off right is a common-law right of a party that is both a debtor and a creditor of the same counterparty. Such a right permits an entity to reduce its obligation to a counterparty if that counterparty fails to pay its obligation to the entity. In the event of a transferor’s bankruptcy, the transferee may only have an unsecured claim against the transferor for its share of the amount set off. For example, assume that an entity has a $50,000 loan from a bank and maintains a $60,000 deposit with the bank. If the entity goes bankrupt, the bank would have the right to reduce the entity’s deposit account by up to $50,000 to offset any loss the bank would incur from the entity’s failure to repay the loan. In the event of the bank’s receivership, the entity would have the right to reduce the amount due to the bank under the loan by up to $50,000 to offset any loss that it might incur from the bank’s failure to repay the amount on deposit. If the bank transfers the loan receivable from the entity to a third party, the set-off rights of the entity and the bank would typically not be impaired. Thus, if the bank is in receivership, the transferee may have only an unsecured claim against the bank for its share of the amount (if any) set off by the entity.

The FASB did not require that set-off rights related to transferred financial assets be severed to meet the legal isolation condition and the definition of a participating interest. Paragraph A40 of the Basis of Conclusions of FASB Statement 166 states:

Several Board members stated that set-off rights related to a transferred financial asset should be severed to meet the isolation requirement. However, the Board learned that it may not be possible to sever set-off rights related to transferred financial assets. For example, certain consumer protection rules prevent consumers from waiving their ability to exercise set-off rights against a seller of goods financed under a contract with the seller. In other cases, it may be impractical or infeasible for a transferor to sever set-off rights related to transferred financial assets because doing so would require the involvement of an obligor on the original financial assets who may not even be aware of or otherwise involved in the transfer. Attorneys told the Board that a court likely would compel a transferor that benefited from an exercise of set-off rights on a transferred financial asset to pass through a proportionate share of that benefit to any transferee that held a share of the related original financial asset. Constituents also told the Board that set-off risks are assessed and included in the price for the transaction like other dilutive risks, such as warranties and returns. The Board ultimately decided that set-off rights would not be an impediment to meeting the isolation requirement or the participating interest definition.

3.3.2 Interpretive Guidance

3.3.2.1 General

Q&A 3-32 Likelihood of Bankruptcy or Receivership Is Remote

Question

Is the requirement in ASC 860-10-40-5(a) met if a transferor concludes that the likelihood that it would enter bankruptcy or receivership is remote?

Answer

No. The legal isolation condition in ASC 860-10-40-5(a) cannot be met on the basis that it is unlikely that the transferor would enter bankruptcy or become subject to receivership. As discussed in ASC 860-10-40-11, ASC 860-10-40-5(a) focuses on whether transferred financial assets would be isolated from the transferor in the event that the transferor did enter bankruptcy or became subject to receivership. The likelihood that such an event would occur is not relevant to the isolation analysis.

Q&A 3-33 Transfers Outside the United States

Question

Is the objective of the legal isolation condition the same for transfers that occur outside the United States?

Answer

Yes. The legal isolation requirement in ASC 860-10-40-5(a) is the same for such transfers; however, the evaluation of the legal isolation condition may be more complex when financial assets are transferred in foreign locations, especially when consolidated affiliates of the transferor included in the financial statements being presented are domiciled in different countries than the transferor. To achieve legal isolation, attorneys must ensure that each relevant jurisdiction is evaluated and that all laws and regulations in such jurisdictions are considered.

The effect of recourse on legal isolation varies by jurisdiction. In some jurisdictions, transfers with full recourse may not place transferred financial assets beyond the reach of the transferor and its creditors although transfers with limited recourse may. The extent of recourse would depend on the laws and regulations applicable in the jurisdiction. In some countries, legal isolation may not be achieved unless the transferor notifies the borrower that its loan has been sold to a third party. In these cases, legal title to the loan will not be transferred before such notification is given. In other countries, notification is not required but the transferor must register the transfer to achieve legal isolation.

The transferor should consider the need to obtain a legal opinion addressing legal isolation in both the jurisdiction in which financial assets were originated and the jurisdiction in which they are transferred (i.e., legal opinions in multiple jurisdictions may be necessary when financial assets are originated in one country and transferred between multiple entities in different countries). In some situations, the bankruptcy laws or receivership authorities applicable to both the transferor and transferee must be considered.

Q&A 3-34 Impact of Additional Forms of Continuing Involvement After the Transfer Date

Question

Could the legal isolation of transferred financial assets be affected by additional forms of the transferor’s continuing involvement that did not exist and were not contemplated as of the transfer date?

Answer

Yes. ASC 860-10-40-41 does not limit the reasons for which an entity could regain control over a previously sold financial asset. Rather, the entity should consider all involvement of a transferor with transferred financial assets in analyzing whether the transferor has surrendered control over those assets, even if the involvement occurs after the original transfer date. Therefore, if there are additional forms of continuing involvement of the transferor or its consolidated affiliates included in the financial statements being presented after the transfer date, the legal isolation conclusion must be updated to take into account such additional involvement. This could result in a conclusion that previously sold financial assets no longer meet the legal isolation requirement and therefore must be rerecognized by the transferor.

Q&A 3-35 Transfers of Financial Assets Between Subsidiaries of a Common Parent

Question

Does ASC 860-10-40-5(a) apply to transfers between subsidiaries of a common parent?

Answer

Yes. For the condition in ASC 860-10-40-5(a) to be met, an entity must conclude that the transferred financial assets are isolated in the event of the bankruptcy or other receivership of the subsidiary-transferor and any consolidated affiliates included in its financial statements. Such a conclusion cannot be reached without a true sale opinion and, when relevant, a nonconsolidation opinion.

Q&A 3-36 Accounting in Stand-Alone Financial Statements of BRSPEs

Question

If a BRSPE prepares stand-alone financial statements, should it account for a transfer of financial assets to a securitization entity as a sale?

Answer

Generally, no. A BRSPE is included in a two-step securitization transaction so that the transferor can achieve legal isolation under ASC 860-10-40-5(a). However, the transfer of financial assets received by the BRSPE (from the transferor) to the securitization entity will generally not represent a true sale. Therefore, in its stand-alone financial statements, the BRSPE will generally account for the transfer as a secured borrowing.

A BRSPE serves to allow a transferor to achieve legal isolation in a securitization transaction. Although the BRSPE is not consolidated with the transferor for the legal analysis (i.e., a nonconsolidation opinion is obtained), the transferor will generally consolidate the BRSPE in its U.S. GAAP financial statements in accordance with ASC 810-10. Intuitively, one would think that if the BRSPE must recognize the transferred financial assets in its stand-alone financial statements and the transferor must consolidate the BRSPE under ASC 810-10, the transferor must recognize the transferred financial assets in its consolidated financial statements. However, that is not how ASC 860-10 is applied. Rather, the collective steps in a two-step securitization transaction are evaluated as a whole, which allows the transferor to apply sale accounting if all the conditions in ASC 860-10-40-5 are met and consolidation of the ultimate securitization entity under ASC 810-10 is not required. In summary, neither of the following results in a requirement for the transferor to account for a transfer of financial assets in a two-step securitization transaction as a secured borrowing:

The consolidation of the BRSPE under ASC 810-10.
The BRSPE’s recognition of the transferred financial assets in its stand-alone financial statements.

Even if a BRSPE does not derecognize the transferred financial statements in its stand-alone financial statements, in the transferor’s consolidated financial statements, the transferred financial assets are considered to have been sold (i.e., not owned by the BRSPE) when all the conditions in ASC 860-10-40-5 are met and the transferor does not consolidate the ultimate securitization entity under ASC 810-10.

3.3.2.2 Impact of Consolidated Affiliates and Agents on Legal Isolation Analysis

Q&A 3-37 Consideration of Consolidated Affiliates in Legal Isolation Analysis

ASC 860-10-40-5(a) states, in part, that “[t]ransferred financial assets are isolated in bankruptcy or other receivership only if the transferred financial assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor or any of its consolidated affiliates included in the financial statements being presented.” A BRSPE is not considered a consolidated affiliate in the isolation analysis.

Question

In evaluating legal isolation, should a transferor consider involvement of a consolidated affiliate included in the financial statements being presented as if it were involvement of the transferor?

Answer

No. The legal isolation analysis must take into account any involvement by consolidated entities included in the transferor’s financial statements. However, the legal isolation analysis does not need to be performed on the basis of an assumption that all involvement of consolidated affiliates included in the financial statements being presented represents direct involvement by the transferor. Such an assumption would be hypothetical. ASC 860-10-40-5(a) requires that for transferred financial assets to be legally isolated from the transferor, they must also be beyond the reach of the powers of a bankruptcy trustee or other receiver for any of the transferor’s consolidated affiliates included in the transferor’s financial statements (other than BRSPEs). Thus, any involvement of a consolidated affiliate included in the financial statements being presented must be considered to ensure that such involvement does not result in the inability of (1) the transferor to conclude that it meets the legal isolation requirement or (2) the consolidated affiliate to conclude that the transferred financial assets are beyond its reach and the reach of its creditors in the event of its bankruptcy or receivership. In these analyses, the involvement of consolidated affiliates included in the financial statements being presented should be considered on the basis of the actual terms of the transfer. It is unlikely that an attorney would issue a true sale opinion or nonconsolidation opinion on the basis of a hypothetical assumption that any involvement of a consolidated affiliate was direct involvement by the transferor. See Example 3-8 for an illustration.

Q&A 3-38 Consideration of Agents in Legal Isolation Analysis

Question

To meet the condition in ASC 860-10-40-5(a), must transferred financial assets be legally isolated from agents of either the transferor or its consolidated affiliates included in the financial statements being presented?

Answer

No. ASC 860-10-40-5(a) does not specifically require that transferred financial assets be legally isolated from agents of the transferor or agents of consolidated affiliates included in the transferor’s financial statements being presented. However, to meet the objective of accounting for a transfer of financial assets as a sale, any continuing involvement of agents of the transferor (or agents of consolidated affiliates included in the transferor’s financial statements being presented) should be considered in the legal isolation analysis. That is, an entity should consider whether the involvement of agents precludes a conclusion that the transferred financial assets are legally isolated from the transferor and its consolidated affiliates included in the financial statements being presented.

3.3.2.3 Legal Opinions

Q&A 3-39 Need for Legal Opinion

Question

Is a transferor required to obtain a legal opinion to support the condition in ASC 860-10-40-5(a)?

Answer

Generally, yes. Unless a transferor has a reasonable basis for concluding that, if requested, a true sale opinion and a nonconsolidation opinion (if relevant) that would support the legal isolation condition could be obtained, the transferor should obtain appropriate legal opinions to support the condition in ASC 860-10-40-5(a). Legal opinions typically must be obtained unless either of the following is true:

The transaction represents a routine transfer of financial assets, and the transferor and its consolidated affiliates included in the financial statements being presented have no continuing involvement in the transferred financial assets.
The transferor has previously obtained appropriate legal opinions for the same transaction, subject to the same laws and regulations.

Although mortgage loan transfers involving the GNMA, FHLMC, and FNMA may occur in accordance with standardized terms, if there is continuing involvement other than standard representations and warranties, transferor entities must obtain legal opinions to support the legal isolation condition.

Q&A 3-40 Use of External Legal Counsel

Question

When a legal opinion is needed to support the condition in ASC 860-10-40-5(a), must it be obtained from a third-party attorney?

Answer

No. The most important consideration is the qualification of the attorney providing the opinion. An attorney who is an expert in bankruptcy and insolvency laws and, when relevant, the authority of receivers may provide legal opinions. However, since most entities do not employ such experts, entities generally engage external counsel with specialty in such matters to provide legal opinions supporting the isolation condition.

Q&A 3-41 Reliance on Legal Opinions

Question

What are some common pitfalls that cause legal opinions to be unreliable for an entity and its auditors to use to support the legal isolation condition in ASC 860-10-40-5(a)?

Answer

Examples of problems with legal opinions include, but are not limited to, the following:

Lack of an explicit acknowledgment that the transferor and its auditors may rely on the opinion to support the legal isolation condition in ASC 860-10-40-5(a).
Assurance at a “should” level rather than a “would” level.
Exclusion of certain agreements from the analysis (e.g., side letters).
Circularity resulting from references that the attorney is relying on the fact that the parties to a transfer will account for it as a sale under ASC 860-10.
Qualifying language stating that the opinion does not apply to the extent that the transferor files for bankruptcy within a certain extended period after the transfer (or language indicating an assumption that such a filing would not take place).
Qualifying language regarding how a court would view recourse.
Limitations or qualifications suggesting that the parties need to perform additional legal analysis (e.g., cautionary language about “raw and evasive” powers of bankruptcy courts if there is a statement that the parties to the transfer must further take this into account in concluding whether the legal isolation condition is met).
Acknowledgment of a right of redemption in a transfer subject to the U.S. Bankruptcy Code without evaluation of the impact of this right on legal isolation.
Assumptions that debtors have been notified of the transaction when the parties do not intend to provide such notification.
Different assumptions for tax treatment.

Q&A 3-42 Need to Update Legal Opinions

Question

What are some matters for a transferor to consider in determining whether a new or updated legal opinion is necessary for routine transfers of financial assets?

Answer

In evaluating whether a new or updated legal opinion is necessary for routine transactions, a transferor should consider its experience with similar transactions. For example, a transferor might reach a legal conclusion without consulting an attorney if a legal opinion was obtained in connection with a previous transaction that involved the same asset type and transaction terms, when the applicable laws and regulations are the same as those for the transaction being evaluated. In any of the following circumstances, however, a new or updated legal opinion should generally be obtained:

There are significant differences in the transaction terms.
The relevant insolvency laws and regulations are different (e.g., the transfer is subject to the bankruptcy laws of a different jurisdiction).
There has been a change in the relevant bankruptcy laws or authorities of a receiver.

ASC 860-10-40-10 indicates that all available evidence that either supports or questions an entity’s legal assertions should be considered. The following are examples (not all-inclusive) of factors that suggest a new or updated legal opinion may be required because the transaction terms differ from those of similar prior transfers subject to the same bankruptcy laws:

Lockbox arrangements have not been made in the transferee’s name to legally segregate the cash receipts from lenders from the transferor’s or servicer’s cash (i.e., the transferor’s and transferee’s assets are commingled).
The underlying borrowers have not been notified that their loans have been transferred.
A history of more than infrequent and insignificant representation and warranty violations indicates that the underwriting process is flawed.
Additional forms of recourse have been provided.

Footnotes

See Example 3-10 for an illustration of how consolidated affiliates are included in this evaluation.

A transferor’s unilateral right to rescind a transfer would preclude sale accounting for one or more reasons. Such a right could (1) prevent the transfer from meeting the legal isolation condition, (2) constrain the transferee from pledging or exchanging the transferred financial asset, or (3) provide the transferor with effective control over the transferred financial asset. A transferor’s conditional right to rescind or revoke a transfer could also preclude sale accounting because it could prevent the transfer from meeting the legal isolation condition. Such a conditional right may not, however, prevent the conditions in ASC 860-10-40-5(b) and (c) from being met. Such a conclusion would depend on the nature of the condition affecting exercisability and whether the transferred financial assets are readily obtainable in the marketplace.

In some transfers, the transferor and transferee may be domiciled in different countries. In these situations, it may be necessary to consider the relevant insolvency laws of both the transferor and the transferee.

A transferor’s power to require the return of transferred financial assets that arises solely from a contract with the transferee (e.g., a call option or ROAP) would not necessarily preclude a conclusion that transferred financial assets have been legally isolated from the transferor. However, under ASC 860-10-40-5(b) and (c), such a power might preclude sale accounting.

A true sale opinion may not be required if (1) the transferor’s only continuing involvement is standard representations and warranties and (2) the transferor is able to conclude that a true sale opinion that would support the legal isolation could be obtained, if requested of an attorney. See Section 3.1.1.2 for further discussion of the concept of continuing involvement.

While this transaction may meet the legal isolation condition in ASC 860-10-40-5(a), unless a third party provides some sort of guarantee that the principal and interest on the transferred financial assets will be repaid, investors may not find such a transaction attractive because the credit quality of the beneficial interests may not be high enough.

When such rights of redemption exist, legal isolation cannot be achieved in a single-step securitization transaction in the United States.

While the BRSPE may not be considered a consolidated entity of the transferor in the legal analysis, the consolidation accounting analysis under ASC 810-10 must still be performed.

ASC 860-10-40-5(a) states, in part, that “[f]or multiple step transfers, a bankruptcy-remote entity is not considered a consolidated affiliate for purposes of performing the isolation analysis.”

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.