Chapter 3 — Accounting for Transfers of Financial Assets

3.6 Application of Sale Accounting Conditions to Specific Transactions

3.6.1 Securitization in Which the Transferor Obtains the Resulting Securities

3.6.1.1 General

ASC 860-50

25-4 An entity that transfers its financial assets to an unconsolidated entity in a transfer that qualifies as a sale in which the transferor obtains the resulting securities and classifies them as debt securities held to maturity in accordance with Topic 320 may either separately recognize its servicing assets or servicing liabilities or report those servicing assets or servicing liabilities together with the asset being serviced.

Before ASU 2009-16, an entity could transfer mortgage loan receivables to a securitization trust, obtain a third-party guarantee on the mortgage loans, retain 100 percent of the beneficial interests in the trust, and achieve sale accounting if the trust was a QSPE (i.e., a guaranteed mortgage securitization).43 As a result, even though assets remained recognized on the transferor’s balance sheet, the mortgage loans were recharacterized as debt securities. ASU 2009-16 eliminated the concepts of a QSPE and guaranteed mortgage securitization. Under ASC 860-10, transferred receivables (e.g., loan receivables) may not be recharacterized as securities unless the transfer qualifies as a sale.44 Although ASU 2009-16 eliminated the guidance on guaranteed mortgage securitizations, it is still possible for an entity to transfer mortgage loan receivables to an unconsolidated securitization trust, retain all the resulting beneficial interests of the trust, and achieve sale accounting. This is explicitly acknowledged in ASC 860-50-25-4.

For a transfer of mortgage loan receivables to qualify as a sale when the transferor retains all the resulting beneficial interests in the transferred mortgage loans, the following conditions must be met:

The transferor obtains a third-party guarantee on all the transferred mortgage loans from an entity such as the FHLMC and FNMA.
The transferor is not required to consolidate the trust under ASC 810-10.
The transfer meets all the conditions in ASC 860-10-40-5.

Sections 3.6.1.2 and 3.6.1.3 further discuss these requirements. See Section 6.2.2.1 for discussion of the recognition of servicing assets and servicing liabilities in these transactions.

If an entity transfers mortgage loans to a securitization trust, obtains a third-party guarantee on the loans, retains 100 percent of the beneficial interests in the trust, and does not meet the conditions for sale accounting, the transfer is a secured borrowing. The loan receivables may not be recharacterized as securities (i.e., the transferor would not recognize beneficial interests in the assets), and the transferor would not recognize any obligation to the trust.

3.6.1.2 Consolidation of the Trust

ASC 810-10

Consolidation Based on Variable Interests

25-38A A reporting entity with a variable interest in a VIE shall assess whether the reporting entity has a controlling financial interest in the VIE and, thus, is the VIE’s primary beneficiary. This shall include an assessment of the characteristics of the reporting entity’s variable interest(s) and other involvements (including involvement of related parties and de facto agents), if any, in the VIE, as well as the involvement of other variable interest holders. Paragraph 810-10-25-43 provides guidance on related parties and de facto agents. Additionally, the assessment shall consider the VIE’s purpose and design, including the risks that the VIE was designed to create and pass through to its variable interest holders. A reporting entity shall be deemed to have a controlling financial interest in a VIE if it has both of the following characteristics:

The power to direct the activities of a VIE that most significantly impact the VIE’s economic performance
The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The quantitative approach described in the definitions of the terms expected losses, expected residual returns, and expected variability is not required and shall not be the sole determinant as to whether a reporting entity has these obligations or rights.

Only one reporting entity, if any, is expected to be identified as the primary beneficiary of a VIE. Although more than one reporting entity could have the characteristic in (b) of this paragraph, only one reporting entity if any, will have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance.

The trusts used in these types of securitization transactions would meet the definition of a VIE because of the lack of significant equity investment at risk. Therefore, the transferor would need to determine whether it is the primary beneficiary of the trust. If the transferor is the primary beneficiary of the trust, it would not be able to recharacterize transferred mortgage loan receivables as securities.

Both the transferor and the guarantor hold significant variable interests in the trust. By owning all the beneficial interests in the transferred mortgage loans, the transferor holds a variable interest that meets the second condition in ASC 810-10-25-38A. The guarantor would also meet this condition given the credit risk exposure associated with the guarantee obligation, which is a variable interest in the trust. Since there are only two entities that are substantively involved in the trust (i.e., the transferor and the guarantor), and the two entities generally do not share power in these transactions, either the transferor or the guarantor will meet the first condition in ASC 810-10-25-38A and be the primary beneficiary of the trust.45 Therefore, the focus is on whether the transferor or guarantor meets the “power” condition.

Generally, credit risk is designed to be passed on to the variable interest holders in these structures. Therefore, the party with the power to control the activities that affect credit risk would meet the first condition in ASC 810-10-25-38A. Credit risk in these transactions is generally controlled by the party that has the ability to make decisions when mortgage loans in the trust become delinquent or default. While the transferor may perform the primary servicing activities (e.g., collection and distribution of principal and interest payments on the mortgage loans, preparing and distributing monthly statements to borrowers, complying with other reporting requirements), the guarantor may have special servicing rights, as a result of which it controls the right to make the significant decisions when mortgage loans become delinquent or default. If, however, the transferor controls the actions that are taken in response to credit issues related to the transferred mortgage loans, the transferor would meet the condition in ASC 810-10-25-38A(a) and would be required to consolidate the trust. Accordingly, the transferor would be unable to recharacterize the transferred mortgage loans as securities.

If the transferor is able to conclude that any servicing rights it has are administerial and that the guarantor controls the activities related to credit risk management (i.e., the activities that most significantly affect the trust’s economic performance), the guarantor would meet the condition in ASC 810-10-25-38A(a) and would consolidate the trust. However, to reach this conclusion, the transferor must evaluate all the rights and responsibilities of each party to the transaction as well as other terms and conditions that may influence the conclusion about the identification of the primary beneficiary. The transferor would not be able to conclude that the guarantor controls the activities that most significantly affect the trust’s economic performance if it has the ability to do any of the following:

Participate in the decisions made by the guarantor (i.e., participating rights).46
Replace or remove the guarantor as a special servicer for other than cause.
Unwind the transfer by dissolving the trust and reclaiming the transferred mortgage loan receivables.47

This type of transaction would qualify as a sale under ASC 860-10 only if a third party provides a guarantee on the mortgage loans transferred by the entity. The accounting for the MSRs in such a transaction depends on how the entity accounts for the debt securities received in the transfer.

3.6.1.3 Sale Accounting Conditions

To meet the legal isolation condition in ASC 860-10-40-5(a), the transferor must conclude that the transfer is a true sale at law and that the trust would not be substantively consolidated under U.S. bankruptcy laws or other relevant receivership laws that would apply (e.g., FDIC receivership laws).

In the evaluation of ASC 860-10-40-5(b), it is appropriate to conclude that the transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing activities. In these types of transactions, the only third-party interest in the trust is the guarantee. Thus, the only potential asset of the guarantor to which the pledge or exchange condition could be considered to apply is related to any guarantee fees receivable. However, as discussed in Q&A 3-46, a guarantor does not need the ability to pledge or exchange its guarantee fee receivable to meet the condition in ASC 860-10-40-5(b). As a result, there is no other third-party beneficial interest in the transferred mortgage loans; therefore, there is no beneficial interest for which the pledge or exchange condition must be applied. This does not preclude the transfer from meeting the condition in ASC 860-10-40-5(b) because third-party beneficial interests are not required to exist for the condition in ASC 860-10-40-5(b) to be met.

The effective-control condition in ASC 860-10-40-5(c) is evaluated in conjunction with the assessment of the consolidation of the trust under ASC 810-10. If the transferor has the unilateral ability to reclaim the transferred mortgage loans, sale accounting under ASC 860-10-40-5 would not be achieved and the transferor would also be the primary beneficiary of the trust. Because there are no third-party beneficial interests, the transferor would not maintain control over the transferred mortgages by having effective control over third-party beneficial interests.

3.6.2 Securitization Transactions

3.6.2.1 General

ASC 860-10

Pass-Through, Pay-Through, and Revolving-Period Securitizations

55-44 Paragraphs 860-10-05-7 through 05-13 provide background on securitization transactions. In pass-through and pay-through securitizations, receivables are transferred to the entity at the inception of the securitization, and no further transfers are made; all cash collections are paid to the holders of beneficial interests in the entity. Pass-through, pay-through, and revolving-period securitizations that meet the conditions in paragraph 860-10-40-5 qualify for sale accounting under this Subtopic, provided the securitization entity is not consolidated by the transferor or its consolidated affiliates in the financial statements being presented.

3.6.2.2 Credit Card Securitizations

3.6.2.2.1 Background

A bank or other financial institution may finance pools of credit card receivables by entering into securitization transactions. Common types of securitization transactions include the following:

A credit card issuer transfers entire credit card receivables to a BRSPE that transfers undivided interests in those receivables to a securitization trust that sells one or more classes of beneficial interests to third parties.
A credit card issuer transfers undivided interests in credit card receivables to a BRSPE that transfers those interests to a securitization trust that sells one or more classes of beneficial interests to third parties.
A credit card issuer transfers entire credit card receivables to a BRSPE that transfers those entire receivables to a securitization trust that sells one or more classes of beneficial interests to third parties.

In many cases, there is a specified reinvestment period during which the credit card issuer transfers additional credit card receivables or undivided interests in credit card receivables to the BRSPE from selected credit card accounts that are then transferred to the securitization entity. Repayments on the previously transferred credit card receivables or undivided interests provide the cash flows to purchase the additional amounts during the reinvestment period. To issue senior, highly rated classes of beneficial interest to third parties, the credit card issuer (transferor) provides credit enhancements by either receiving subordinated beneficial interests when entire credit card receivables are transferred to the securitization entity or retaining subordinated undivided interests when undivided interests are transferred. The interests retained by the transferor are often referred to as “seller’s interests.” The amount of cash proceeds that the credit card issuer can obtain when entire credit card receivables or undivided interests in credit card receivables are transferred generally depends on certain ratios or excess spread levels (e.g., ratios involving credit card balances or the extent to which income received by the securitization entity during a collection period, including interest and fees, exceeds the fees and expenses of the entity during the collection period, such as interest expense, servicing fees, and charged-off receivables). Thus, the seller’s interest may change during the reinvestment period. In addition, other features protect the third-party investors, including early amortization triggers that may depend on the availability and adequacy of cash flows generated by the securitization entity to meet contractual payment obligations to the third-party investors. The credit card issuer generally continues to service the credit card receivables.

After the reinvestment period ends, there is a liquidation period during which third-party investors receive repayments on their beneficial interests through payments on the credit card receivables. Several different types of liquidation methods can be used to allocate payments once the reinvestment period ends, including the fixed participation method, floating participation method, and controlled amortization method.

3.6.2.2.2 Accounting Considerations

A securitization involving the transfer of undivided interests in credit card receivables is unlikely to be accounted for as a sale. Generally, the credit card issuer will provide a credit enhancement by transferring senior interests in entire credit card receivables, which are not participating interests.48 Even if the interests transferred do not take priority over the interests retained by the transferor, given the revolving nature of credit card accounts, it is difficult to transfer a portion of credit card receivables and meet the definition of a participating interest. As cardholders make additional draws on credit card accounts, they lose their identity and become part of a larger credit card balance. Thus, for interests in credit card receivables to meet the definition of a participating interest, they need to be interests in a credit card account. However, investors only want to purchase interests that have stated maturity dates. Since credit card accounts do not have stated maturity dates, it is practically impossible to structure a participating interest in credit card receivables that will be paid off by a stated date from the cash flows of credit card accounts. Any approach designed to allow for payoff of transferred interests from cash flows on active credit card accounts generally causes one or more of the conditions of a participating interest not to be met.

Securitization transactions involving entire credit card receivables are more common than those involving the transfer of interests in credit card receivables. In practice, the credit card issuer generally retains significant beneficial interests in the securitization entity and continues to service the transferred receivables. As a result, the issuer is generally considered the primary beneficiary of the securitization entity under ASC 810-10. Since it consolidates the securitization entity, the issuer cannot achieve sale accounting for the transferred receivables.

If a credit card issuer determines that it is not required to consolidate the securitization entity, it should focus on any ROAPs involved in the securitization. A ROAP that provides the transferor with the unilateral ability to remove specific credit card accounts (e.g., by replacing them with other credit card accounts) would cause the condition in ASC 860-10-40-5(c) not to be met for all of the transferred credit card receivables that are subject to the ROAP. Similarly, a ROAP contingent on a transferor’s decision would preclude sale accounting for all the potentially affected credit card receivables. The following ROAPs would generally not cause the transferor to maintain effective control over the transferred credit card receivables because the transferor would not have the unilateral ability to reclaim specific assets:

Certain ROAPs that allow for limited random removal of accounts.
Default ROAPs.
ROAPs contingent on actions of third parties.

However, certain ROAPs may cause the transferor to later regain control over credit card receivables that were previously considered sold. See Section 4.3 for more information.

3.6.3 Factoring and Other Transfers of Receivables

3.6.3.1 General

ASC 860-10

Factoring Arrangements

55-45 Paragraph 860-10-05-14 provides background on factoring arrangements. Factoring arrangements that meet the conditions in paragraph 860-10-40-5 shall be accounted for as sales of financial assets because the transferor surrenders control over the receivables to the factor.

Transfers of Receivables With Recourse

55-46 Paragraph 860-10-05-15 provides background on transfers of receivables with recourse. The effect of a recourse provision on the application of paragraph 860-10-40-5 may vary by jurisdiction. In some jurisdictions, transfers with full recourse may not place transferred financial assets beyond the reach of the transferor, its consolidated affiliates (that are not entities designed to make remote the possibility that it would enter bankruptcy or other receivership) included in the financial statements being presented, and its creditors, but transfers with limited recourse may.

Transfer consists of an entire financial asset or a group of entire financial assets. Before the method of recourse can be evaluated to determine the appropriate accounting treatment, the entity shall first determine whether a sale has occurred because in some jurisdictions recourse might mean that the transferred financial assets have not been isolated beyond the reach of the transferor, its consolidated affiliates (that are not entities designed to make remote the possibility that it would enter bankruptcy or other receivership) included in the financial statements being presented, and its creditors. A transfer of receivables in their entireties with recourse shall be accounted for as a sale, with the proceeds of the sale reduced by the fair value of the recourse obligation, if the conditions in paragraph 860-10-40-5 are met. Otherwise, a transfer of receivables with recourse shall be accounted for as a secured borrowing.
Transfer does not consist of an entire financial asset or a group of entire financial assets. The transferred financial asset must meet the definition of a participating interest. A transfer of a portion of a receivable with recourse, other than that permitted in paragraph 860-10-40-6A(c)(4), does not meet the requirements of a participating interest and shall be accounted for as a secured borrowing.

55-47 See paragraph 860-20-55-24 for further guidance on accounting for transfers of receivables with recourse.

ASC 860-10-55-45 through 55-47 address matters for an entity to consider in determining whether transfers of receivables meet the conditions for sale accounting. Transfers of trade receivables are discussed below.

3.6.3.2 Transfers of Trade Receivables

3.6.3.2.1 General

Trade receivables may be transferred directly to a third party (e.g., a financial institution) or as part of a securitization transaction (e.g., a transfer to a CP conduit). Transfers of trade receivables are generally accompanied by a credit enhancement provided by the transferor. Such credit enhancement could be in the form of a guarantee (see Section 3.6.3.2.2.2); however, entities generally provide a credit enhancement by transferring trade receivables in return for initial proceeds that are less than the fair value of the transferred receivables. For example, an entity may initially receive cash equal to only 85 percent of the principal amount of the transferred receivables. The remaining proceeds are paid to the transferor after repayment of the trade receivables (i.e., after the transferee receives repayment of its investment and a return). In this example, the 15 percent not paid as of the transfer date represents a credit enhancement provided to the transferee to increase the likelihood that the transferee recovers its principal investment and a return. In practice, this “held back” amount is often referred to as a DPP receivable. This amount absorbs credit losses and the financing costs associated with the transaction. Because there is a financing cost involved in transfers of trade receivables, the transferor would generally not receive the entire remaining 15 percent even if there were no credit losses on the trade receivables.

The form of a transfer of trade receivables with a credit enhancement will affect whether sale accounting can be achieved. In any transfer of trade receivables, the transferor must determine whether it has transferred entire trade receivables or interests in trade receivables. As discussed in Section 3.1.2.1, this determination is made on the basis of (1) the legal form of the transferred asset and (2) what the transferred asset conveys to its holder. For a transaction to represent a transfer of entire trade receivables, an entity must transfer full title and interest in trade receivables rather than transferring undivided interests or security interests in trade receivables. In determining the unit of account for transfers of trade receivables, the entity should consider the sale agreement and other transaction documents as well as any legal opinions (e.g., true sale opinions) obtained from attorneys.

If an entity transfers an undivided interest in trade receivables, sale accounting cannot be achieved if the transferor provides any credit enhancement to the transferee. Whether the transferor provides a guarantee or retains an undivided interest in transferred trade receivables (e.g., a 15 percent subordinated interest), secured borrowing accounting is required because the transferred interests are not participating interests.49 However, if an entity transfers entire trade receivables, it is not subject to the guidance on participating interests. Therefore, an entity may provide a credit enhancement and achieve sale accounting if (1) it is not required to consolidate the transferee and (2) the credit enhancement does not represent excessive recourse that prevents the legal isolation condition in ASC 860-10-40-5(a) from being met.50 For example, an entity may be able to achieve sale accounting by transferring entire trade receivables and receiving, as proceeds, a DPP that represents a subordinated beneficial interest in the transferred receivables. For this type of transfer to meet the conditions for sale accounting, an entity must generally transfer trade receivables in a two-step securitization transaction that involves multiple sellers of trade receivables. The involvement of multiple sellers is necessary for the transferor to avoid consolidating the transferee under ASC 810-10. See Section 3.6.3.2.2 for further discussion.

3.6.3.2.2 Two-Step Securitization Transactions Involving Multiple Sellers

3.6.3.2.2.1 General

In a typical two-step securitization transaction involving multiple seller entities, an entity transfers entire trade receivables to a BRSPE, which then transfers those entire trade receivables to a CP conduit (a securitization entity) that funds such purchases by issuing CP to third parties that are secured by the purchased receivables.51 These CP conduits generally purchase trade receivables from multiple unrelated sellers.

A typical two-step securitization transaction involving trade receivables can be depicted as follows:52

There are several benefits to structuring multiseller CP conduits. The cost of funding such structures is lower than it is with other forms of financing because of risk diversification, since multiple third parties sell trade receivables to such entities. In addition, these structures provide an accounting benefit by allowing each transferor to conclude that it only has an interest in specified assets of the CP conduit. Under ASC 810-10, in the absence of silos, which generally do not exist in these structures, each transferor can conclude that it does not consolidate any portion of the CP conduit because it does not have a variable interest in the conduit entity. This is important because if an entity transfers trade receivables to a securitization entity that only purchases the entity’s trade receivables, the entity would generally be required to consolidate the securitization entity under ASC 810-10 because it continues to service the transferred trade receivables.

In transfers of trade receivables involving two-step securitization transactions, entities must obtain a true sale opinion and a nonconsolidation opinion. As discussed in Section 3.3.1.3, these opinions only address the first transfer to the BRSPE. While these legal opinions may support a conclusion that the first transfer involves entire trade receivables, the entity must still conclude that the second transfer from the BRSPE to the CP conduit represents a transfer of entire trade receivables or apply the definition of participating interest to this second transfer. The true sale opinion and nonconsolidation opinion obtained for the first transfer will not constitute sufficient evidence that the second transfer involves entire trade receivables. Therefore, entities will need to determine whether the second transfer from the BRSPE to the CP conduit involves entire trade receivables.

In many two-step securitization transactions involving CP conduits, the second transfer is a transfer of entire trade receivables in return for cash and a beneficial interest in the transferred receivables (e.g., a DPP receivable or other subordinated note). However, since legal opinions are generally not obtained for this transfer, an entity will need other evidence to support that this transfer involves entire trade receivables.53 The entity must evaluate all the relevant terms of the transaction agreements to determine the nature of the second transfer. To support that entire trade receivables have been transferred from a BRSPE (as transferor) to a CP conduit (as transferee), the transaction agreements should specifically acknowledge the following:

Full title to the trade receivables (as opposed to interests in trade receivables) have been transferred from the BRSPE to the CP conduit.
The BRSPE is a creditor of the CP conduit with respect to any beneficial interest (e.g., DPP receivable) issued by the CP conduit as part of the proceeds paid to purchase the trade receivables.
The CP conduit is a creditor of the obligors on the trade receivables and is not a creditor of the BRSPE.54
None of the assets obtained or liabilities incurred between the BRSPE and CP conduit may be offset (e.g., the CP conduit cannot legally offset the trade receivables acquired against the obligation for the DPP issued to the BRSPE).

If the second transfer does not represent the transfer of entire trade receivables, an entity must consider the guidance on participating interests unless it can conclude that all portions of the trade receivables have been transferred. See Example 3-12 for an illustration.

3.6.3.2.2.2 BRSPE Issues Guarantee to Securitization Entity

In most two-step securitization transactions of trade receivables that are accounted for as sales, an entity transfers entire trade receivables to a BRSPE, which then either (1) transfers those entire trade receivables to a securitization entity or (2) transfers portions of those entire trade receivables that make up 100 percent of the trade receivables to multiple securitization entities. Example 3-12 illustrates the latter type of transaction. In both cases, the transferor, through the BRSPE, receives a beneficial interest in the transferred trade receivables.

While such structures achieve the transferor’s objectives from the perspective of cash flow financing and balance sheet presentation (i.e., the trade receivables are derecognized and no additional debt is recognized), they result in undesirable cash flow statement reporting. Under ASC 230-10-45-12(a), all collections of cash on a transferor’s beneficial interests in a securitization of trade receivables must be classified as investing activities. As a result, a significant amount of cash collections that result from an entity’s ongoing revenue-producing activities are classified as investing, rather than operating, activities.

To prevent a significant reduction in operating cash flows, some entities have structured trade receivable securitization transactions to fail to meet the conditions for sale accounting. While such structuring resolves the cash flow statement reporting issue discussed above (i.e., all cash collections on the trade receivables are classified as operating cash flows since the trade receivables are not derecognized from the balance sheet), it is accompanied by the requirement to recognize significant liabilities for the proceeds received from such transactions. Accordingly, in such situations, an entity often may find it difficult to meet requirements related to covenants on other outstanding debt.

A more recent transaction structure that has been designed to meet the objective of derecognizing trade receivables while maintaining the ability to classify cash flows received from repayment of trade receivables as operating activities involves the use of a guarantee to provide a credit enhancement to the transferee. That is, instead of providing a credit enhancement by receiving a subordinated beneficial interest in the transferred trade receivables, the transferor guarantees the repayment of the transferred trade receivables. The following flowchart depicts how this type of transfer may be structured:55

This alternative transaction is similar to the one discussed in Section 3.6.3.2.2.1 (referred to hereafter as the “traditional transaction”) in that an entity transfers trade receivables to a CP conduit (through a BRSPE) and initially receives an amount of cash proceeds that is less than the total principal amount of receivables transferred. However, the transferor does not receive any beneficial interest (i.e., DPP) in the transferred receivables. (In this way, the alternative transaction differs from the traditional transaction.) Therefore, all cash received on the trade receivables transferred to the BRSPE in the alternative transaction will represent cash inflows from operating activities.56 Any guarantee payments made by the BRSPE would also be classified as cash outflows from operating activities.57

The alternative structure raises questions regarding how the sale accounting guidance in ASC 860-10 should be applied. Unlike the traditional transaction (and other typical two-step securitization transactions), the alternative transaction constitutes a situation in which all of the financial assets received by the BRSPE are not transferred to the securitization entity (i.e., the CP conduit). Because the legal isolation condition in ASC 860-10-40-5(a) focuses only on the transfer to the BRSPE, the recourse provided to the CP conduit from the BRSPE’s guarantee will not be considered in the true sale or substantive nonconsolidation analysis. That is, the legal opinions will focus only on the activities between the entity and the BRSPE. However, this aspect of the alternative transaction is not dissimilar from the traditional transaction in that the recourse or credit enhancement that exists through the DPP issued by the CP conduit is also not considered in the legal isolation analysis. That is, in the traditional transaction, the legal isolation condition also focuses only on the transfer to the BRSPE.

Since the BRSPE exists only to achieve legal isolation, and such isolation can be achieved regardless of whether the BRSPE issues a guarantee to the CP conduit or receives a subordinated beneficial interest from the CP conduit (i.e., under both structures, the legal isolation only focuses on the transfer from the entity to the BRSPE), we believe that sale accounting can be achieved in the alternative transaction provided that true sale and nonconsolidation opinions are received for the first transfer. In that case, as with the traditional transaction, there is no need to consider whether the transfer from the BRSPE to the CP conduit is a true sale at law. In fact, as discussed in Section 3.3.1.4.3, under either structure, it is difficult to achieve a true sale for the second transfer.

Because the BRSPE does not transfer interests in trade receivables to the CP conduit, there is no need to consider the guidance on participating interests in the accounting analysis that is applied to the second transfer.58 This is appropriate because the guidance on participating interests is applied on the basis of the form, and not just the substance, of the transaction (see Section 3.2). However, we do believe that for the sale accounting conditions in ASC 860-10-40-5 to be met, because of the BRSPE’s guarantee to the CP conduit, there generally needs to be nonpetition language in the transaction agreements pertaining to the second transfer. Such language provides assurance that in the event that the BRSPE’s trade receivables pledged as collateral are not sufficient to make the CP conduit whole for losses, the CP conduit could not petition the BRSPE into bankruptcy. In the absence of such nonpetition language, it would be difficult to have reasonable assurance that the BRSPE’s bankruptcy is, in fact, remote. Remember that BRSPEs only exist to ensure that the possibility is remote that the transferor, its consolidated affiliates that are not BRSPEs, or its creditors could reclaim transferred financial assets.

3.6.4 Repurchase Financings

ASC 860-10

Conditions for a Sale of Financial Assets

40-4C Items (b) through (c) in paragraph 860-10-40-4 do not apply to a transfer of financial assets and a related repurchase financing. In transactions involving a contemporaneous transfer of a financial asset and a repurchase financing of that transferred financial asset with the same counterparty, a transferor and transferee shall separately account for the initial transfer of the financial asset and the related repurchase agreement. Paragraphs 860-10-55-17A through 55-17C provide implementation guidance related to repurchase financings.

Repurchase Financings

55-17A The purpose of this implementation guidance is to illustrate the characteristics of a transaction comprising an initial transfer and a repurchase financing and to preclude an analogy to other financing transactions that are outside the scope of the guidance in paragraph 860-10-40-4C, which states that items (b) through (c) in paragraph 860-10-40-4 do not apply to a transfer of financial assets and a related repurchase financing.

55-17B The diagram in the preceding paragraph depicts the following three transfers of a financial asset that typically occur in the transactions within the scope of the guidance in paragraph 860-10-40-4C:

The initial transferor transfers a financial asset to the initial transferee in return for cash.
The initial transferee enters into a repurchase financing with the initial transferor. The initial transferee transfers the previously transferred financial asset to the initial transferor as collateral for the financing. The initial transferee receives cash from the initial transferor. As part of the repurchase financing, the initial transferee is obligated to repurchase the financial asset (or substantially the same financial asset) at a fixed price within a prescribed time period.
The initial transferee makes the required payment to the initial transferor under the terms of the repurchase financing. Upon receipt of payment, the initial transferor returns the transferred asset (or substantially the same asset) to the initial transferee.

55-17C Whether or not the parties agree to net settle the steps in items (a) and (b) of the preceding paragraph shall not affect whether the transactions are within the scope of the guidance for repurchase financings in paragraph 860-10-40-4C.

A repurchase financing is a repurchase agreement on a transferred financial asset between the same counterparties (or consolidated affiliates of either counterparty) that is entered into contemporaneously with, or in contemplation of, the initial transfer. ASC 860-10-40-4C addresses how the unit-of-account guidance differs for repurchase financings and requires that the initial transfer discussed in ASC 860-10-55-17B(a) be evaluated for sale accounting separately from the related repurchase agreement. As a result, the transferor will often account for the initial transfer as a sale and the initial transferee will often account for the initial transfer as a purchase. Both parties will then generally account for the repurchase agreement element as a secured borrowing. The accounting for repurchase financings is an exception to the general requirements in ASC 860-10 regarding the linkage of transactions and may not be applied by analogy to other transactions.

3.6.5 Repurchase Agreements and Securities Lending Transactions

3.6.5.1 General

ASC 860-30 — 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.

ASC 860-10

Repurchase Agreements and Securities Lending Transactions

55-51 Paragraphs 860-10-05-19 through 05-21 provide background on repurchase agreements. Paragraphs 860-10-05-16 through 05-18 provide background on securities lending transactions. Repurchase agreements and securities lending transactions are required to be evaluated under each of the following conditions for derecognition in accordance with paragraph 860-10-40-5:

Isolation. Paragraph 860-10-40-5(a) requires an assessment of whether the transferred financial assets are isolated from the transferor. Paragraphs 860-10-40-5(a) and 860-10-40-8 require that the transferred financial assets be placed beyond the reach of all consolidated affiliates, except for certain bankruptcy-remote entities, included in the financial statements being presented.
Transferee’s rights to pledge or exchange. Paragraph 860-10-40-5(b) requires an assessment of the transferee’s rights to pledge or exchange the transferred financial assets. If a transferor has transferred financial assets to an independent third-party custodian, or to a transferee, under conditions that preclude the transferee from selling or repledging the assets during the term of the repurchase agreement, the transferor has not surrendered control over those assets. In a securities lending transaction, to the extent that the collateral consists of letters of credit or other financial instruments that the holder is not permitted by contract or custom to sell or repledge, the transaction does not satisfy the sale conditions and is accounted for as a loan of securities by the transferor to the transferee.
Effective control. Paragraph 860-10-40-5(c) requires an assessment of whether the transferor maintains effective control over transferred financial assets. An agreement that both entitles and obligates the transferor to repurchase transferred financial assets from the transferee in accordance with paragraph 860-10-40-5(c)(1) that meets the criteria in paragraph 860-10-40-24 maintains the transferor’s effective control over transferred financial assets. Therefore, transfers with agreements to repurchase transferred financial assets that either meet the effective control criteria or qualify for the repurchase-to-maturity transaction exception need not be assessed under the remaining conditions for derecognition and should be accounted for as a secured borrowing. Paragraph 860-10-55-51A illustrates the application of the effective control condition in paragraph 860-10-40-5(c)(1).

Repurchase agreements and securities lending transactions that do not meet all the conditions in paragraph 860-10-40-5 should be treated as secured borrowings.

55-51A Under certain agreements to repurchase transferred financial assets before their maturity, the transferor maintains effective control over the transferred financial assets. If effective control is maintained or the transaction qualifies for the repurchase-to-maturity transaction exception, the agreement is accounted for as a secured borrowing. If effective control is not maintained or the repurchase-to-maturity transaction exception is not met, the transaction would be assessed under the other derecognition conditions in paragraph 860-10-40-5 to determine if the transferred financial asset should be derecognized and accounted for as a sale.

55-51B The following illustrates the application of the derecognition guidance in paragraphs 860-10-40-24 through 40-24A:

Repurchase agreements and securities lending transactions—assets that are identical. The following illustrates agreements for which the transferor maintains effective control over the transferred financial asset:
1. A financial asset is transferred under a contemporaneous agreement with the same counterparty that requires the transferor to repurchase or redeem it before its maturity at a fixed price or at the sale price plus or minus a lender’s return.
2. A financial asset is transferred under a securities lending transaction that requires the transferee to return to the transferor the identical asset before its maturity at a fixed price.
Repurchase agreements and securities lending transactions—assets that are substantially the same. The following illustrates agreements for which the transferor maintains effective control over the transferred financial asset:
1. A financial asset is transferred under a contemporaneous agreement with the same counterparty to repurchase or redeem an asset that is substantially the same as the initially transferred asset (in accordance with paragraph 860-10-40-24(a)) before its maturity at a fixed price or at the sale price plus or minus a lender’s return.
2. A financial asset is transferred under a securities lending transaction that requires the transferee to return to the transferor an asset that is substantially the same as the initially transferred financial asset (in accordance with paragraph 860-10-40-24(a)) before its maturity at a fixed price.
3. Fixed-coupon and dollar-roll repurchase agreements, and other contracts under which the securities to be repurchased are substantially the same in accordance with paragraph 860-10-40-24(a) as the securities initially transferred.
Repurchase-to-maturity transactions. A repurchase-to-maturity transaction is accounted for as a secured borrowing as if it maintains the transferor’s effective control over the transferred financial asset. A transfer of a financial asset with a contemporaneous total return swap to maturity does not meet the definition of repurchase-to-maturity transaction.
Cash-settled repurchase agreements. If a financial asset is transferred under a contemporaneous agreement with the same counterparty to repurchase or redeem it before its maturity at a fixed repurchase price or a price equal to the sale price plus or minus a lender’s return and the agreement requires the transferee to settle the agreement in cash, the agreement does not maintain the transferor’s effective control over the transferred financial assets. An exception is a repurchase-to-maturity transaction as discussed in (c).

55-54 In repurchase agreements and securities lending transactions involving readily obtainable held-to-maturity debt securities, the conditions set forth in paragraph 860-10-40-24 should be carefully evaluated to determine whether the transaction should be accounted for as a sale or secured borrowing. For example, if the security that is required to be returned has a different maturity or has a different contractual interest rate from the transferred security, the substantially-the-same criterion would not be met. In that circumstance, effective control would not be maintained under the condition in paragraph 860-10-40-5(c) and the transfer would be accounted for as a sale if the other conditions in paragraph 860-10-40-5 are met.

55-55 If the conditions in paragraph 860-10-40-5 are met, the transferor should account for the repurchase agreement as a sale of financial assets and a forward repurchase commitment, and the transferee should account for the agreement as a purchase of financial assets and a forward resale commitment.

55-55A If the conditions in paragraph 860-10-40-5 are met, a securities lending transaction should be accounted for as follows:

By the transferor as a sale of the loaned securities for proceeds consisting of the cash collateral and a forward repurchase commitment. If the collateral in a transaction that meets the conditions in paragraph 860-10-40-5 is a financial asset that the holder is permitted by contract or custom to sell or repledge, that financial asset is proceeds of the sale of the loaned securities.
By the transferee as a purchase of the borrowed securities in exchange for the collateral and a forward resale commitment.

During the term of that agreement, the transferor has surrendered control over the securities transferred and the transferee has obtained control over those securities with the ability to sell or transfer them at will. In that circumstance, creditors of the transferor have a claim only to the collateral and the forward repurchase commitment.

55-56 Repurchase agreements that involve an exchange of securities or letters of credit are accounted for in the same manner as securities lending transactions (see paragraphs 860-30-25-7 through 25-8).

55-56B In repurchase agreements and securities lending transactions in which the transferor does not derecognize the transferred financial asset, if the transferee obtains the right to sell or pledge the asset, the transferor reclassifies the asset in its statement of financial position separately from other assets not so encumbered in accordance with paragraph 860-30-45-1.

3.6.5.1.1 Repurchase Agreements Before Maturity

3.6.5.1.1.1 General

Repurchase agreements that involve the transfer of existing securities, with a contemporaneous agreement to repurchase the same or substantially the same securities at a fixed or determinable price before maturity, are accounted for as secured borrowings by the transferor and transferee.59 Secured borrowing accounting is required because these agreements are designed to maintain the transferor’s effective control over the transferred assets. Because the condition in ASC 860-10-40-5(c) is not met, it can be concluded that sale accounting is not achieved without evaluating the conditions in ASC 860-10-40-5(a) and (b). Sections 1.2.4 and 5.2.1 provide additional background on repurchase agreements. Section 3.6.5.1.1.2 further discusses dollar-roll transactions. Section 5.2.1 discusses the transferor’s and transferee’s accounting for repurchase agreements as secured borrowings.

In certain circumstances, the transferor does not maintain effective control over the transferred financial assets; therefore, sale accounting is required if the conditions in ASC 860-10-40-5(a) and (b) are met. In cash-settled repurchase agreements, the transferor’s repurchase obligation is net-cash-settled rather than physically settled. Cash-settled transactions are treated as the transfer of financial assets with a total return swap. Legal title to the financial assets is generally transferred; however, in some situations, the total return swap may represent a form of recourse that prevents the transfer from meeting the legal isolation condition in ASC 860-10-40-5(a) (see Example 3-11). The transferee is generally able to pledge or exchange the transferred financial assets; therefore, the condition in ASC 860-10-40-5(b) will often be met.

In some repurchase agreements, the asset to be repurchased is not the same or substantially the same as the transferred asset; therefore, the transferor does not maintain effective control under ASC 860-10-40-5(c)(1). Depending on the circumstances, the transferor may also not maintain effective control under ASC 860-10-40-5(c)(2) and (c)(3). Repurchase agreements for which the financial asset to be repurchased is not the same or substantially the same as the transferred financial asset often involve the transfer of legal title to the financial asset and are legally sales; therefore, the condition in ASC 860-10-40-5(a) will often be met. The transferee generally can pledge or exchange the transferred financial assets (which are often readily obtainable); therefore, the condition in ASC 860-10-40-5(b) will also be met. As a result, these transactions may be accounted for as sales.

If a repurchase agreement meets the conditions for sale accounting, in accordance with ASC 860-10-55-55, the transferor accounts for the transaction as a sale of financial assets and a forward repurchase commitment. The forward repurchase commitment constitutes either an asset received as proceeds or a liability incurred; therefore, any initial fair value of that commitment is recognized as an asset or liability and affects the gain or loss on sale. In accordance with ASC 860-10-55-55, the transferee recognizes a purchase of the transferred financial assets and an asset or liability for the forward resale commitment if it has a fair value other than zero as of the transfer date. Both the transferor and transferee must evaluate whether their forward commitment meets the definition of a derivative instrument in ASC 815-10. If so, that forward contract would be subsequently accounted for at fair value, with changes in fair value recognized in earnings (provided that hedge accounting is not applied) in accordance with ASC 815-10. See Chapter 4 for further discussion of the accounting for sales of financial assets.

Connecting the Dots

If a transferred financial asset is accompanied by a repurchase feature that entitles but does not obligate the transferor to repurchase the transferred financial asset (i.e., a call option) or that obligates but does not entitle the transferor to repurchase the transferred financial asset (i.e., a put option), the guidance on forward contracts to repurchase transferred financial assets does not apply (i.e., the transfer is not a repurchase agreement). Rather, the transferor would evaluate the effect that the call option (or put option) has on whether the conditions in ASC 860-10-40-5(b) and (c) are met. The “substantially the same” criterion discussed below does not generally apply to the evaluation of whether such options prevent a transfer from meeting the conditions in ASC 860-10-40-5(b) and (c). See Sections 3.4 and 3.5 for further discussion of the evaluation of whether call options and put options preclude sale accounting.

3.6.5.1.1.2 Dollar Rolls

ASC 860-10

Dollar-Roll Repurchase Agreement

An agreement to sell and repurchase similar but not identical securities. The securities sold and repurchased are usually of the same issuer. Dollar rolls differ from regular repurchase agreements in that the securities sold and repurchased have all of the following characteristics:

They are represented by different certificates.
They are collateralized by different but similar mortgage pools (for example, conforming single-family residential mortgages).
They generally have different principal amounts.

Fixed coupon and yield maintenance dollar agreements comprise the most common agreement variations. In a fixed coupon agreement, the seller and buyer agree that delivery will be made with securities having the same stated interest rate as the interest rate stated on the securities sold. In a yield maintenance agreement, the parties agree that delivery will be made with securities that will provide the seller a yield that is specified in the agreement.

Government National Mortgage Association Rolls

The term Government National Mortgage Association (GNMA) rolls has been used broadly to refer to a variety of transactions involving mortgage-backed securities, frequently those issued by the GNMA. There are four basic types of transactions:

Type 1. Reverse repurchase agreements for which the exact same security is received at the end of the repurchase period (vanilla repo)
Type 2. Fixed coupon dollar reverse repurchase agreements (dollar repo)
Type 3. Fixed coupon dollar reverse repurchase agreements that are rolled at their maturities, that is, renewed in lieu of taking delivery of an underlying security (GNMA roll)
Type 4. Forward commitment dollar rolls (also referred to as to-be-announced GNMA forward contracts or to-be-announced GNMA rolls), for which the underlying security does not yet exist.

ASC 860-10

Dollar-Roll Repurchase Transactions

55-17 A transfer of financial assets under a dollar-roll repurchase agreement is within the scope of this Subtopic if that agreement arises in connection with a transfer of existing securities. In contrast, dollar-roll repurchase agreements for which the underlying securities being sold do not yet exist or are to be announced (for example, to-be-announced Government National Mortgage Association [GNMA] rolls) are outside the scope of this Subtopic because those transactions do not arise in connection with a transfer of recognized financial assets. See paragraph 860-10-55-60 for related guidance.

Dollar Rolls

55-58 Whether paragraph 860-10-40-5(c) precludes sale accounting for a dollar-roll transaction depends on the facts and circumstances. Paragraph 860-10-40-24 states the conditions under which an agreement that both entitles and obligates the transferor to repurchase or redeem transferred financial assets from the transferee maintains the transferor’s effective control over those assets as described in paragraph 860-10-40-5(c)(1). The condition in paragraph 860-10-40-24(a) requires that the financial assets to be repurchased or redeemed are the same or substantially the same as those transferred. Paragraph 860-10-40-24(a) describes six characteristics that must all exist for a transfer to meet the substantially-the-same requirement. Paragraph 860-10-40-24(a)(6) requires (as one of those six characteristics) that the financial asset that was transferred and the financial asset that is to be repurchased or redeemed have the same aggregate unpaid principal amount or principal amounts within accepted good delivery standards for the type of security involved.

55-59 For transfers of existing securities under a dollar-roll repurchase agreement, the transferee must be committed to return substantially-the-same securities to the transferor, which would indicate that the transferor has maintained effective control. In a transfer of existing securities under a dollar-roll repurchase agreement, if the transferee is committed to return substantially-the-same securities to the transferor but that transferee’s securities at the time of the transfer were to-be-announced securities, the transferor would not be precluded from accounting for the transfer as a secured borrowing. The transferor is only required to obtain a commitment from the transferee to return substantially-the-same securities and is not required to determine that the transferee holds the securities that it has committed to return. Therefore, the financial asset to be returned may be a to-be-announced asset at the time of the transfer because the transferor would have no way of knowing whether the transferee held the security to be returned.

55-60 As illustrated by the following, whether a GNMA roll is accounted for as a secured borrowing or a sale affects the evaluation of the forward contract embedded in the securities subject to the agreement:

Types 1–3 of dollar rolls would qualify for secured borrowing treatment if the redemption of securities on substantially the same terms is assured (see paragraph 860-10-40-24). In that circumstance, the forward contracts embedded in the Types 1–3 securities are outside the scope of Topic 815 because of the scope exception provided in paragraph 815-10-15-63 for derivative instruments that serve as impediments to sale accounting.
Types 2 and 3 securities that involve repurchase of other than substantially-the-same securities are considered sales of securities and forward contracts. The forward contract would need to be evaluated under Subtopic 815-10 because it has terms that would generally meet the definition of a derivative instrument. If the dollar-roll repurchase agreement is accounted for as a sale under this Subtopic, Subtopic 815-10 provides guidance on the subsequent accounting for the forward contract.

The term “dollar-roll transaction” describes various transactions. All dollar-roll transactions are similar in that they involve a transfer of mortgage pass-through securities or MBSs and are accompanied by the transferor’s agreement to subsequently purchase MBSs from the transferee. The securities transferred and repurchased are generally GNMA, FHLMC, or FNMA MBSs. While dollar-roll transaction types are similar to one another, key differences in agreement terms can affect the accounting. ASC 860-10 describes four types of dollar-roll transactions:

Type 1 — This is a traditional repurchase agreement involving an MBS. Because the identical security is received at the end of the repurchase agreement, the transferor maintains effective control over the transferred MBS and this transaction is accounted for as a secured borrowing.
Type 2 — In these transactions, an entity transfers an existing MBS for cash and simultaneously agrees to repurchase a similar, but not identical, security in the future. The parties may agree that the transferor will repurchase an MBS that has the same stated interest rate as the interest rate on the MBS originally transferred (a fixed-coupon agreement) or that has a specified yield (a yield maintenance agreement). As discussed in ASC 860-10-55-59, these agreements are accounted for as secured borrowings if the transferee is committed to return substantially the same securities to the transferor. The fact that the securities to be returned are not (or not known to be) owned by the transferee as of the initial transfer date (i.e., they may be TBA) is not relevant. As long as the transferee commits to return substantially the same securities, the transferor is considered to have maintained effective control over the transferred securities in accordance with ASC 860-10-40-5(c)(1). If it is determined that the MBS to be returned is not substantially the same, these transactions would generally be accounted for as sales with forward purchase commitments that often meet the definition of a derivative instrument.
Type 3 — A Type 3 dollar-roll transaction is similar to a Type 2 dollar-roll transaction except that at maturity of the repurchase agreement, the parties mutually agree to extend the maturity date by “rolling” it to a future date. The parties accomplish this by entering into a new commitment that offsets the current repurchase commitment. The new commitment specifies the new repurchase date. In these transactions, the extension of the commitment date does not constitute a transfer under ASC 860-10. For these transactions to be accounted for as secured borrowings, the MBS to be repurchased under the original terms and the new contract terms must be substantially the same as the MBS originally transferred.
Type 4 — These transactions represent forward commitments involving TBA contracts. That is, the transferor agrees to deliver an MBS in the future and repurchase an MBS at a later date. The parties to these transactions agree on the key characteristics of the MBS to be delivered. Those characteristics generally conform to the “good delivery” standards within SIFMA’s Uniform Practices. By following these guidelines, entities establish the terms of the MBS eligible to be delivered as of the settlement date for the initial transfer and the subsequent repurchase. Entities often use these types of transactions to economically hedge mortgage risks. When such transactions are used as part of such a strategy, the transferor intends to offset its obligations to deliver MBSs at the settlement date by subsequently entering into another TBA contract to purchase equivalent securities that have the same settlement date. Delivery of securities never occurs and there are only net settlements of price differentials. As discussed in ASC 860-10-55-17, a dollar-roll transaction that does not involve the transfer of existing securities is not within the scope of ASC 860-10. Transactions involving delivery of mortgage securities that are TBA are not within the scope of ASC 860-10 because the MBSs to be delivered as of the settlement date of the initial transfer either do not exist or are not owned by the transferor (see ASC 860-10-55-17). ASC 815-10-30-4 and ASC 815-10-35-4 require that all forward commitment dollar rolls be accounted for initially and subsequently at fair value even if such arrangements do not meet the definition of a derivative instrument. See Example 3-23 for an illustration.

In Type 2 and Type 3 dollar-roll transactions, the specific securities to be repurchased are not identified because they are TBA. Accordingly, in such transactions, it is difficult to evaluate whether the securities to be repurchased are substantially the same as those initially transferred. Section 3.6.5.1.1.3 discusses the conditions that must be met for the securities to be repurchased to be considered substantially the same as the securities initially delivered by the transferor. This guidance generally distinguishes between dollar-roll repurchase agreements that are accounted for as secured borrowings and those that are accounted for as sales of securities with a forward commitment. There is diversity in practice related to whether the securities to be repurchased are considered substantially the same as those initially transferred. This diversity was acknowledged in the Basis for Conclusions of ASU 2014-11:

BC29. One condition for assessing effective control for repurchase agreements and other transactions is that the financial assets to be repurchased or redeemed are the same or substantially the same as those transferred. Through outreach, the Board learned that there is diversity in applying the substantially-the-same guidance in practice. In particular, parties to mortgage dollar-roll transactions that involve the return of securities that are not identified at the inception of the transaction (to-be-announced securities) may reach different judgments in applying the substantially-the-same criteria, potentially resulting in asymmetrical accounting between the transferor and the transferee (for example, the transferor reflecting secured borrowing accounting and the transferee reflecting sale accounting). The Board also learned through outreach that the removal of the criterion pertaining to an exchange of sufficient collateral related to the transferor’s ability to repurchase or redeem the financial assets on substantially the agreed-upon terms has resulted in an increased emphasis on the substantially-the-same guidance in practice in determining whether the effective control criterion is met and secured borrowing accounting can be applied.

BC30. The Board considered several approaches with the objective of reducing this diversity in practice. In deliberations leading to the proposed Update, the Board observed that the term substantially the same should be interpreted as a narrow construct. In the proposed Update, the Board proposed implementation guidance to narrow the application of the characteristic in paragraph 860-10-40-24(c) by indicating that historical levels of prepayment speeds, other market information related to prepayment speeds, and market yields on similar securities could be considered in assessing this condition. Many respondents disagreed and noted that the proposed changes could be interpreted to suggest that the assessment is performed after the completion of the transaction or solely on historical experience rather than at inception of the transaction based on the contractual terms. Some respondents noted that the proposed requirement to consider historical yields on similar trades would be inoperable for transfers of existing assets and forward repurchases of to-be-announced securities executed through the Mortgage-Backed Securities Division (MBSD) of the Fixed Income Clearing Corporation (FICC), because member firms typically will receive securities as settlement only for their net position so that it is not possible to match a specific sale transaction to a specific repurchase transaction.

BC31. The Board considered those comments and determined that the proposed implementation guidance to consider historical data could be viewed as inconsistent with an evaluation of the current transaction. Additionally, it could be viewed as incompatible with existing implementation guidance that indicates that for transfers of existing securities under a dollar-roll repurchase agreement, the transferor is only required to obtain a commitment from the transferee that it will return a substantially-the-same security, even if that security is to-be-announced at the time of the initial transfer, and the transferor is not required to determine that the transferee holds the security that it has committed to return.

BC32. In redeliberations, the Board considered a practical approach of adding implementation guidance to articulate that a transaction executed in keeping with good delivery standards would not automatically result in the return of a substantially-the-same financial asset. Furthermore, the Board decided that trade stipulations that result in narrowing the characteristics of the asset to be returned in a manner that more closely mirrors the characteristics of the asset initially transferred result in a greater measure of control over the security that will be returned and, therefore, could satisfy the substantially-the-same characteristics. However, a dollar-roll transaction that is executed without any trade stipulations or no commitment from the transferee to return a substantially-the-same financial asset results in the transferor having no control over the assets that will be returned and, therefore, the financial asset to be returned could not be considered substantially the same as the financial asset transferred.

BC33. The Board solicited targeted feedback on this approach, and outreach participants generally disagreed, noting that the presence of trade stipulations as a determining factor in assessing a substantially-the-same financial asset does not align with market practice. Outreach participants generally noted that the substantially-the-same assessment requires judgment and rests on analyzing economic characteristics, particularly weighted-average maturity or weighted-average loan age to assess the market yield of the security to be returned. Some respondents agreed with the approach and noted that without parameters of what security could be returned, the transferor does not have a commitment from the transferee to return a substantially-the-same financial asset.

BC34. The Board ultimately decided not to change the current guidance on the substantially-the-same condition within effective control. The Board noted that the initial focus of the project leading to this Update was the accounting for repurchase-to-maturity transactions and repurchase agreement disclosures and that the priority is to address the concerns that led the Board to undertake the project. In addition, the Board observed that there are a number of complex considerations related to the accounting for dollar-roll transactions, which represent a small segment of the overall to-be-announced security market. Therefore, the Board decided not to further deliberate the substantially-the-same guidance at this time.

Example 3-22 illustrates a dollar-roll transaction that is accounted for as a secured borrowing.

Connecting the Dots

While dollar-roll transactions often involve collateral posting requirements, ASC 860-10 does not require entities to consider whether a transferor has the ability to repurchase the transferred financial assets in a repurchase agreement. Thus, the nature and terms of collateral posting in dollar-roll transactions do not affect the determination of whether the transactions are accounted for as sales or secured borrowings.

3.6.5.1.1.3 “Substantially the Same” Criterion

ASC 860-10-40-24 and ASC 860-10-55-35 provide guidance on whether the securities that must be returned by the transferee are “substantially the same” as the securities transferred by the transferor. Under ASC 860-10-40-24, all of the following conditions must be met for the exchanged securities to be substantially the same:

Same primary obligor (or same guarantor and same guarantee terms for debt guaranteed by a sovereign government, central bank, or government-sponsored enterprise).
Identical form and type.
Same maturity (or similar remaining weighted-average maturities for MBSs).
Identical contractual interest rates.
Similar collateral underlying the asset.
Same aggregate unpaid principal amounts or principal amounts within accepted good delivery standards for the type of security involved.

Generally, these conditions will only be met for readily obtainable securities.

An entity may sell an MBS that is accompanied by an agreement to repurchase a TBA MBS in accordance with the good delivery standards in SIFMA’s 2019 Uniform Practices. Those good delivery standards would not result in the repurchase of securities that are substantially the same because the transferee is permitted to deliver MBSs that may be outside the weighted-average maturity and yield requirement in ASC 860-10-40-24(a)(3). For example, Section 9 of Chapter 8 of SIFMA’s 2019 Uniform Practices states that the following would be in accordance with the good delivery standards:

Fannie Mae and Freddie Mac Transactions

In order to satisfy good-delivery guidelines for TBA transactions:

The final maturity of 30-year Fannie Mae and Freddie Mac securities must be greater than 15 years and 1 month at issuance.
The final maturity of 30-year Fannie Mae and Freddie Mac securities shall not exceed 361 months.
The final maturity of 15-year Fannie Mae and Freddie Mac securities shall not exceed 181 months.

For Fannie Mae and Freddie Mac transactions, 20-year securities are eligible for good delivery against 30-year TBA transactions, and 10-year securities are eligible for delivery against 15-year transactions.

Ginnie Mae Transactions

In order to satisfy good-delivery guidelines for 30-year Ginnie Mae TBA transactions, the final maturity of the security must be at least 28 years (336 months) in length from the date of issuance. Ginnie Mae 30-year securities with a final maturity of less than 28 years should be traded on a specified basis. 30-year Ginnie Mae Platinum securities are good delivery against 30-year Ginnie Mae TBA transactions, even though it is possible for the stated final maturities of these pools to be less than 28 years. 30-year Ginnie Mae Platinum securities are good delivery since the final maturities of the individual Ginnie Mae securities underlying a 30-year Ginnie Mae Platinum are each at least 28 years (336 months) from the date of issuance.

Reconstituted Securities (e.g., Supers, Freddie Mirror Securities, and Platinums)

For reconstituted securities, the final maturity guidelines above apply to the underlying securities, not to the reconstituted securities themselves.

SIFMA’s 2019 Uniform Practices allow traders to attach stipulations to more specifically identify delivery requirements, which could enable a repurchase involving a TBA MBS to be substantially the same as a transferred MBS, thereby meeting all the conditions in ASC 860-10-40-24. That is, there could be stipulations that require the transferee to deliver securities that meet the weighted-average maturity and yield criteria in ASC 860-10-40-24(a)(3). Section 8 of Chapter 8 of SIFMA’s 2019 Uniform Practices states, in part:

Stipulated TBA transactions may be executed using any number of stipulations including (but not limited to) maturity date, production- or issue-year, weighted average maturity (WAM), weighted average loan age (WALA), FICO score, geographic distribution or weighted loan balance. When properly used and understood, these stipulations are an efficient mechanism for ensuring delivery of specific pool attributes. In some cases, however, TBA transaction stipulations may result in the delivery of securities with attributes that the purchaser had not intended. This primarily occurs when reconstituted pools (larger pools comprised of smaller pools) are delivered against an open TBA transaction. Reconstituted securities created under the Fannie Mae, Freddie Mac, and Ginnie Mae programs are considered eligible for TBA good delivery if each of the pools underlying a reconstituted pool would qualify as good delivery on its own.

Without stipulations regarding the weighted-average maturity and yield of TBA MBSs to be repurchased, the securities repurchased would not be substantially the same as those sold under SIFMA’s good delivery standards; therefore, in the absence of not meeting one of the other two requirements in ASC 860-10-40-5, sale accounting would be required because the transferor has relinquished control over the transferred securities.

3.6.5.1.1.4 Disclosures

Section 4.5 discusses the disclosures an entity would be required to provide if accounting for a repurchase agreement as a sale. Section 5.5.2 discusses the disclosures required for repurchase agreements that are accounted for as secured borrowings.

3.6.5.1.2 Repurchase-to-Maturity Transactions

ASC 860-10 — Glossary

Repurchase-to-Maturity Transaction

A repurchase agreement in which the settlement date of the agreement to repurchase a transferred financial asset is at the maturity date of that financial asset and the agreement would not require the transferor to reacquire the financial asset.

ASC 860-10 requires that repurchase-to-maturity transactions be accounted for as secured borrowings even if no financial assets are returned to the transferor as of the settlement date. The FASB believes that receiving cash on settlement is equivalent to receiving the transferred financial assets since cash is the only possible form of settlement.60 The prescribed accounting for repurchase-to-maturity transactions is based on a “risks and rewards” approach, which is an exception to the control principles in ASC 860-10. The accounting for repurchase-to-maturity transactions causes the transferor to reflect the transferred financial assets on its balance sheet, which aligns with the fact that the transferor retains the credit risk and market value risk of the transferred financial asset.

For a transaction that meets the definition of a repurchase-to-maturity transaction, there is no need to evaluate any of the sale accounting conditions in ASC 860-10-40-5 because secured borrowing accounting is required. For example, since the transferred financial asset is not returned before maturity, there is no need to evaluate the “substantially the same” criterion that is relevant for repurchase agreements before maturity.

Connecting the Dots

While the accounting applied to repurchase-to-maturity transactions is based on risks and rewards, ASC 860-10-55-51B(c) indicates that a transfer of financial assets with a contemporaneous total return swap to maturity does not represent a repurchase-to-maturity transaction. Therefore, such transactions could meet the conditions for sale accounting, with a derivative recognized for the total return swap. Accounting for such transactions as sales results in a form-over-substance accounting conclusion because the economics are similar to those of a repurchase-to-maturity transaction.

See Section 5.5.2 for disclosures required for repurchase-to-maturity transactions.

3.6.5.2 Securities Lending Transactions

In a securities lending transaction, an owner of a security lends it to a third party in return for a fee. The borrower of the security generally uses the security to cover a short transaction or to settle a customer transaction that has failed. Securities lending transactions often meet the first two conditions for sale accounting because (1) the financial assets transferred are generally considered sales contractually and at law and (2) the financial assets subject to securities lending transactions can generally be pledged or exchanged. However, because securities lending transactions generally require the borrower to return the identical security to the lender, the effective-control condition in ASC 860-10-40-5(c) is generally not met. As a result, the transferor and transferee most often account for securities lending transactions as secured borrowings. Section 5.2.1 discusses the transferor’s and transferee’s accounting for securities lending transactions that are secured borrowings. Section 5.5.2 discusses the disclosures required for securities lending transactions accounted for as secured borrowings.

If a securities lending transaction meets the conditions for sale accounting, the lender (transferor) should derecognize the transferred securities, recognize the cash or other securities received that can be pledged or exchanged as proceeds from the sale, and recognize a forward commitment to repurchase the loaned securities. A gain or loss on sale may be recorded. The transferee accounts for the transaction as a purchase of the borrowed securities and a forward commitment to sell those securities. The transferor and transferee would both need to evaluate whether their forward commitment meets the definition of a derivative instrument in ASC 815-10. See Chapter 4 for further discussion of the accounting for sales of financial assets. Section 4.5 discusses the disclosures an entity would be required to provide if a securities lending transaction is accounted for as a sale.

3.6.5.3 Wash Sales

ASC 860-10

Wash Sales

55-57 Wash sales shall be accounted for as sales under this Subtopic. Unless there is a concurrent contract to repurchase or redeem the transferred financial assets from the transferee, the transferor does not maintain effective control over the transferred financial assets.

In a wash sale, an entity sells a financial asset and then repurchases the same financial asset. The period between the sale and repurchase is often short (i.e., 30 days or less). In the absence of a commitment to repurchase the transferred assets, the transferor is not considered to maintain effective control and the condition in ASC 860-10-40-5(c) would be met for the initial transfer. If the other two conditions in ASC 860-10-40-5 are met, this transfer would be accounted for as a sale under ASC 860-10. The subsequent transaction would be accounted for as a purchase of a financial asset.

3.6.6 Financial Instruments That May Be Assets or Liabilities

ASC 860-10

Application of the Sale Criteria for Financial Instruments That Have the Potential to Be Assets or Liabilities

40-40 Certain recognized financial instruments, such as forward contracts and swaps, have the potential to be financial assets or financial liabilities. Accordingly, transfers of those financial instruments must meet the conditions of both paragraphs 405-20-40-1 and 860-10-40-5 to be derecognized. Paragraph 815-10-40-2 states that transfers of assets that are derivative instruments and subject to the requirements of Subtopic 815-10 but that are not financial assets shall be accounted for by analogy to this Subtopic. The same criteria shall be applied to transfers of nonfinancial derivative instruments that have the potential to become either assets or liabilities (for example, forward contracts and swaps).

ASC 860-10-40-40 specifies that, to be derecognized, transfers of recognized financial instruments that have the potential to be assets or liabilities, such as certain derivatives, must meet the conditions for sale accounting of financial assets in ASC 860-10-40-5 and the conditions for extinguishment of liabilities in ASC 405-20-40-1. This guidance also applies to transfers of nonderivative instruments that may be assets or liabilities (e.g., forwards to acquire a commodity).

3.6.7 Banker’s Acceptances and Risk Participations in Them

ASC 860-10

Banker’s Acceptances and Risk Participations in Them

55-56 Paragraphs 860-10-05-24 through 05-26 provide background on banker’s acceptances and risk participations in them. An accepting bank that obtains a risk participation shall not derecognize the liability for the banker’s acceptance, because the accepting bank is still primarily liable to the holder of the banker’s acceptance even though it benefits from a guarantee of reimbursement by a participating bank. The accepting bank shall not derecognize the receivable from the customer because it has not transferred the receivable. Rather, it controls the benefits inherent in that receivable and it is still entitled to receive payment from the customer. The accepting bank shall, however, record the guarantee purchased, and the participating bank shall record a liability for the guarantee issued. For an illustration of this guidance, see Example 1 (paragraph 860-10-55-80).

3.6.8 Transfer of a Short-Term Loan Made Under a Long-Term Credit Commitment

ASC 860-10

Transfer of a Short-Term Loan Made Under a Long-Term Credit Commitment

55-71 A financial institution involved in commercial lending makes a short-term loan (for example, 90 days) to a borrower under a long-term credit commitment (for example, 5 years). The financial institution transfers the short-term loan, without recourse, to a third-party purchaser for the remaining term of the loan. The risk of loss relating to the short-term loan is legally transferred to the purchaser, and the financial institution has no contractual obligation to repurchase the short-term loan. Under the long-term credit commitment, the financial institution may, at the maturity of the short-term loan, relend to the borrower. However, the financial institution may refuse to relend to the borrower based on a current credit evaluation or if any covenant under the long-term commitment is not satisfied.

55-72 To the extent that the transfer of the short-term loan made under a long-term credit commitment as described above is accounted for as the transfer of a receivable with a put option, it would be required to be accounted for as a sale if the conditions of paragraph 860-10-40-5 are met. The terms of the put option should be analyzed to determine whether it meets the definition of a derivative instrument under Subtopic 815-10.

See Example 3-21 for an illustration of a transfer of a short-term loan made under a long-term credit commitment.

3.6.9 Classification of Transferred Debt Securities

ASC 860-10

Classification of Transferred Debt Securities

55-75 An entity may transfer debt securities to an unconsolidated entity that has a predetermined life in exchange for cash and the right to receive proceeds from the eventual sale of the securities. For example, a third party holds a beneficial interest that is initially worth 25 percent of the fair value of the assets of the entity at the date of transfer. The entity is required to sell the transferred securities at a predetermined date and liquidate the entity at that time. Assume the facts in that example and the following additional facts:

The beneficial interests are issued in the form of debt securities.
Before the transfer, the debt securities were accounted for as available-for-sale securities in accordance with Topic 320.

55-76 In that example, whether the transferor may classify the debt securities as trading at the time of the transfer depends on whether the transfer is accounted for as a sale or as a secured borrowing:

Sale. If a transfer of a group of entire financial assets satisfies the conditions to be accounted for as a sale, Subtopic 860-20 requires that any assets obtained or liabilities incurred in the transfer be recognized (see paragraph 860-20-25-1) and initially measured at fair value (see paragraph 860-20-30-1). If the transfer in the example is accounted for as a sale, the transferor would account for the debt securities received as new assets and would have the option to classify the debt securities received as trading securities.
Secured borrowing. If the transfer is accounted for as a secured borrowing, paragraph 860-30-25-2 requires the transferor to continue to report the transferred debt securities in its statement of financial position with no change in their measurement (that is, basis of accounting). Paragraph 320-10-35-12, which explains that transfers into or from the trading category should be rare, would continue to apply.

55-77 If the transferred financial assets were not securities subject to the guidance in Topic 320 before the transfer that was accounted for as a sale but the beneficial interests were issued in the form of debt securities, then the transferor would have the opportunity to decide the appropriate classification of the beneficial interests received as proceeds from the sale.

ASC 860-10-55-75 through 55-77 discuss the transferor’s accounting for debt securities in a particular transaction. This guidance highlights the fact that when a transfer is not accounted for as a sale, the transferor cannot change the accounting previously applied to the transferred financial asset. If, however, the transfer is accounted for as a sale, an entity may elect an accounting method for any securities received as proceeds. See Chapters 4 and 5 for further discussion of the transferor’s accounting in transfers that are accounted for as sales or secured borrowings.

Footnotes

QSPEs were exempt from consolidation before ASUs 2009-16 and 2009-17 were issued.

As discussed in ASC 948-310-40-1, it is not appropriate to reclassify loans as securities unless the conditions for sale accounting are met. Thus, in the absence of sale accounting, an entity cannot apply the guidance in ASC 320 on debt securities, recognize a servicing asset or liability, or change the measurement basis of the transferred loan receivables.

In this section, it is assumed that the transferor and guarantor do not share power and are not in a related-party or de facto agency relationship. See Chapter 7 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest for further discussion of the guidance that applies in one of these situations.

See footnote 45.

In GNMA securitizations, the transferor is generally able to dissolve the trust when it owns 100 percent of the beneficial interests in the transferred mortgage loans. For this reason, this section refers to guarantees obtained from the FHLMC and FNMA.

As discussed in Section 3.1.1.1, a transfer of a portion of an entire financial asset may not be accounted for as a sale unless the portion meets the definition of a participating interest.

The transferor may achieve sale accounting if it provides a guarantee only if it has transferred interests representing 100 percent of the entire trade receivables. See Section 3.2 for discussion of the conditions that must be met for transferred interests to meet the definition of participating interests.

The remaining sale accounting conditions in ASC 860-10-40-5 must also be met.

In such two-step securitizations, a BRSPE is involved to meet the legal isolation condition. Although the BRSPE will generally be consolidated by the transferor, as long as the transferor is not required to consolidate the CP conduit (i.e., the second entity in the two-step securitization transaction), sale accounting is appropriate if all three conditions in ASC 860-10-40-5 are met (see also Section 3.3.1.4.3).

In this example, it is assumed that an entity transferred $200 million of trade receivables to a BRSPE that transferred those receivables to a CP conduit. Through the BRSPE, the transferor received cash proceeds of $170 million and a $30 million beneficial interest in the transferred trade receivables (i.e., cash proceeds equal to 85 percent of the principal amount of the transferred trade receivables and a DPP receivable equal to 15 percent of the transferred trade receivables). The actual percentage allocation of cash and DPP varies in practice. In addition, these transaction structures are revolving in nature. The collection on the DPP occurs over time as additional receivables are transferred and previously transferred receivables are repaid. Although the DPP is identified as a $30 million interest in this example, the transferor would never receive $30 million because, even with no credit losses, it would incur financing costs from the CP issued by the CP conduit as well as transaction fees.

As discussed in Section 3.3.1.4.3, a legal opinion is generally not obtained for the transfer from the BRSPE to the CP conduit because it is unnecessary to meet the legal isolation condition. Generally, a true sale opinion and nonconsolidation opinion addressing the first transfer to the BRSPE provides reasonable assurance that the legal isolation condition in ASC 860-10-40-5(a) is met. An entity may determine it necessary to consult with an attorney to conclude whether the second transfer represents entire trade receivables or interests in trade receivables.

If the CP conduit is a creditor of the BRSPE, the BRSPE has most likely transferred interests secured by trade receivables pledged as collateral.

In this example, it is assumed that an entity transferred $200 million of trade receivables to a BRSPE that transferred $170 million of those receivables to a CP conduit and pledged the remaining $30 million as collateral on the guarantee of repayment of the receivables transferred to the CP conduit. Through the BRSPE, the transferor received cash proceeds of $170 million. In this example, the BRSPE pledged $30 million of collateral on the guarantee of repayment of the $170 million of transferred trade receivables, which reflects an allocation of cash proceeds equal to 85 percent of the total receivables transferred to the BRSPE. This assumption is made to align with the economics in the example in Section 3.6.3.2.2.1. However, in practice, entities would most likely be required to pledge a higher amount of trade receivables as collateral on the guarantee because the pledged receivables could be repaid before repayment of the trade receivables transferred to the CP conduit. This example does not specifically address the transferor’s payment of financing and other transaction costs for the CP conduit’s issuance of CP. In practice, those fees and costs may be deducted from the cash proceeds or paid separately. In addition, these transactions are revolving in nature (e.g., additional originated trade receivables are transferred to the BRSPE, the BRSPE transfers additional trade receivables to the CP conduit, the BRSPE replenishes collateral pledged on the guarantee).

Cash received from the CP conduit represents cash inflows from operating activities under ASC 260-10-45-16(a), and cash receipts on trade receivables pledged as collateral on the BRSPE’s guarantee also represent operating activities under ASC 260-10-45-16(a).

As discussed in Section 3.3.1.4.3, the transferor consolidates the BRSPE for financial reporting purposes.

Entities should ensure that the BRSPE legally transfers entire trade receivables to the CP conduit. See Section 3.6.3.2.2.1.

The transferor and transferee should account for the transfer symmetrically. As a result, if the transferor concludes that the transfer is a secured borrowing, the transferee similarly accounts for the transaction as a secured borrowing. It is possible for asymmetrical accounting to exist because the parties reached different judgments about the appropriate application of ASC 860-10; however, such situations are expected to be rare.

Secured borrowing accounting is required regardless of whether, in form, the transferred financial asset is returned to the transferor. That is, whether the settlement is explicitly net or implicitly net (i.e., two gross exchanges) does not change the accounting.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.