3.9 Summary of the Effect of Repurchase Options on the Conditions in ASC 860-10 Related to Pledge and Exchange and Effective Control

No(b)

Yes(d)

No(b)

Generally, no(e)

Yes(c)

Yes(d)

Yes(c)

Yes(d)

A conditionally exercisable freestanding call option generally does not preclude sale accounting under ASC 860-10-40-5(b) or (c). Once the condition is resolved and the transferor controls the ability to exercise the option, it is evaluated as a unilaterally exercisable freestanding call option.

No(g)

Generally, no(h)

No(g)

No(h)

Generally, no(g)

Generally, no (h)

No(g)

No(h)

A conditionally exercisable freestanding put option generally does not preclude sale accounting under ASC 860-10-40-5(b) or (c). Once the condition is resolved and the transferee controls the ability to exercise the option, it is evaluated as a unilaterally exercisable freestanding put option. The evaluation of whether the option is deep-in-the-money is performed as of the date sale accounting is achieved and not on the date the exercise condition is resolved.

Whether unilaterally or conditionally exercisable, an attached call option does not constrain a transferee that is able, by exchanging or pledging the asset subject to the option, to obtain substantially all of its economic benefits.

An attached call option is related to specific financial assets. Since the call is attached by the transferor, regardless of the exercise price (i.e., fair value or not fair value) and whether the asset is readily obtainable, it presumptively provides a more than trivial benefit to the transferor. Therefore, with one exception, an attached call option that gives the transferor the unilateral ability to cause whoever holds a specific asset to return it maintains effective control over transferred financial assets. If an attached call option has a fixed purchase price and the option is so far out-of-the-money when written that it is probable that the transferor would not exercise it, the option would not provide the transferor with a more than trivial benefit and therefore would not preclude the condition in ASC 860-10-40-5(c) from being met.

A conditionally exercisable attached call option does not preclude sale accounting under ASC 860-10-40-5(c) if the transferor does not control the ability to exercise the option. Once the condition is resolved and the transferor controls the ability to exercise the option, it is evaluated as a unilaterally exercisable attached call option. The evaluation of whether a fixed-price attached call option is deep-out-of-the-money is performed as of the date sale accounting is achieved and not on the date the exercise condition is resolved.

Whether unilaterally or conditionally exercisable, an attached put option does not constrain a transferee that is able, by exchanging or pledging the asset subject to the option, to obtain substantially all of its economic benefits. A unilaterally exercisable attached put option does not maintain the transferor’s effective control over transferred financial assets unless the option has a fixed price and is so far in-the-money when written that it is probable that the transferee will exercise it and the option requires the transferor to repurchase the transferred financial assets. If this condition is met, the put option maintains the transferor’s effective control over the transferred financial assets regardless of whether they are readily obtainable since an attached call option is related to specific transferred financial assets.

An embedded call option in a transferred financial asset neither constrains the transferee from pledging or exchanging the asset nor maintains the transferor’s effective control over the transferred financial asset.

Options to Purchase Transferred Financial Assets Once They Have Amortized to a Specified Level

A right to repurchase a transferred financial asset once it amortizes to a certain amount or percentage compared with its value as of the transfer date is evaluated as a call option on the entire financial asset. For example, if an entity transfers a loan receivable and has the unilateral right to repurchase it for a fixed price once its balance reaches 25 percent of the balance as of the transfer date, the transferor maintains effective control over the loan receivable as of the transfer date.

Removal-of-Accounts Provisions

ROAPs commonly exist in transfers of groups of financial assets to securitization or asset-backed financing entities. They may also exist in other transfers. Depending on the facts and circumstances, a ROAP may be considered a freestanding call option or an attached call option. Whether a ROAP precludes sale accounting depends on the facts and circumstances as follows:

• Unilaterally exercisable ROAP that allows the transferor to specify the financial assets to be removed — A unilaterally exercisable right of a transferor to specify the financial assets that may be reclaimed from a group of transferred financial assets is evaluated as a freestanding call option on each individual transferred financial asset that could be repurchased even if all of those assets could not be reclaimed because the aggregate amount of repurchases is limited. As discussed above, a freestanding call option precludes sale accounting unless it is a right to purchase (1) readily obtainable financial assets at fair value on the purchase date or (2) financial assets at a fixed price and is so far out of the money when written that it is probable that the transferor would not exercise the option. If a transferor reclaims all the financial assets that can be repurchased from a unilaterally exercisable ROAP that permits selection of the assets to be removed, or the option expires, the remaining transferred financial assets can be derecognized if no other condition in ASC 860-10-40-5 prevents sale accounting.
• Unilaterally exercisable ROAP for random removal of excess financial assets — A unilaterally exercisable call option that allows a transferor to randomly remove excess financial assets is generally evaluated as a freestanding call option. Such an option does not prevent the condition in ASC 860-10-40-5(b) from being met and may not prevent the condition in ASC 860-10-40-5(c) from being met if it is limited to the extent that the transferor cannot remove specific transferred financial assets and the assets that may be removed are limited to the transferor’s interests. For example, a ROAP that gives a transferor the unilateral right to randomly remove excess financial assets from a group of transferred financial assets up to 10 percent of the fair value of the financial assets transferred (all financial assets in the group are less than this 10 percent of the fair value of transferred financial assets) does not preclude sale accounting if the transferor has no other interest in the group. In this situation, the transferor has obtained a 10 percent beneficial interest in the transferred financial assets. This treatment is permitted only if a ROAP is sufficiently limited and the transferor cannot unilaterally remove specific transferred financial assets. A ROAP that allows a transferor to randomly remove a significant amount of transferred financial assets maintains effective control over all the transferred financial assets subject to the ROAP.
• Conditionally exercisable ROAP — A ROAP whose exercise is contingent on an event or circumstance within the transferor’s control (e.g., the decision to exit some portion of the transferor’s business) is evaluated as a unilaterally exercisable call option. A ROAP whose exercise is contingent on an event or circumstance that is not solely within the transferor’s control (e.g., an option to repurchase defaulted loan receivables) generally does not prevent the conditions in ASC 860-10-40-5(b) and (c) from being met until the condition that allows exercise is resolved. At that point, the ROAP is evaluated as a unilaterally exercisable call option and the transferor may be required to rerecognize financial assets previously considered sold.

Right to Rescind a Transfer

A transferor’s unilateral right to rescind a transfer causes the conditions in ASC 860-10-40-5(b) and (c) not to be met.

(a) ASC 860-10-20 defines a freestanding call option as “[a] call option that is neither embedded in nor attached to an asset subject to that call option.” In this table, it is assumed that the freestanding call option held by the transferor is not a cash-settled option or a cleanup call option. Net-cash-settled options do not preclude sale accounting under ASC 860-10-40-5(b) or (c). Cleanup call options do not preclude the conditions in ASC 860-10-40-5(b) or (c) from being met.

(b) A unilaterally exercisable freestanding call option held by the transferor on readily obtainable financial assets does not constrain the transferee because it can otherwise acquire the assets in the marketplace.

(c) A unilaterally exercisable freestanding call option on non-readily-obtainable financial assets conveys a more than trivial benefit to the transferor and constrains the transferee from pledging or exchanging the assets because the transferee might have to default if the call option is exercised and the transferee had pledged or exchanged the assets. If the option has a fixed or determinable price, there is a potential economic benefit to the transferor unless the option is so far out-of-the-money when written that it is probable that the transferor would not exercise it. If the option has an exercise price equal to the fair value of the financial asset when purchased, it provides a more than trivial benefit because the transferor has the ability to obtain an asset that is not readily obtainable, always knows who holds the asset, and can prevent it from being obtained by a competitor.

(d) A unilaterally exercisable freestanding call option that permits the transferor to cause the transferee to return specific transferred financial assets (regardless of whether they are readily obtainable) provides a more than trivial benefit if the option has a fixed or determinable price unless the option is so far out-of-the-money when written that it is probable that the transferor would not exercise it. A freestanding call option that permits the transferor to cause the transferee to return specific non-readily-obtainable transferred financial assets provides a more than trivial benefit if the option’s exercise price is equal to the fair value of the financial assets when purchased because the transferor has the ability to obtain assets that are not readily obtainable, always knows who holds the assets, and can prevent them from being obtained by a competitor.

(e) A unilaterally exercisable freestanding call option that permits the transferor to cause the transferee to return readily obtainable transferred financial assets by paying fair value for such assets when purchased does not provide a more than trivial benefit to the transferor unless it also owns a residual interest in the transferred financial assets.

(f) In this table, it is assumed that any freestanding put option held by a transferee that allows it to require the transferor to repurchase transferred financial assets is not a cash-settled option. Net-cash-settled options do not preclude sale accounting under ASC 860-10-40-5(b) or (c).

(g) Regardless of its price (i.e., fair value or not fair value), a unilaterally exercisable freestanding put option held by a transferee on readily obtainable financial assets does not constrain the transferee because it can pledge or exchange the transferred assets and exercise the put option by otherwise acquiring the assets in the marketplace. A unilaterally exercisable freestanding put option held by a transferee on non-readily-obtainable financial assets also generally does not constrain the transferee because it can always pledge or exchange the transferred assets since it does not have to exercise the put option. However, if the put option’s exercise price is fixed or determinable and is sufficiently deep-in-the-money when written in such a way that it is probable it will be exercised, the option constrains the transferee from pledging or exchanging the transferred financial assets because it would have to hold the financial assets to exercise the put option. The transferor obtains a more than trivial benefit since it has access to assets that are not readily obtainable, always knows who holds the assets, and can prevent these assets from being obtained by a competitor.

(h) A unilaterally exercisable put option held by a transferee does not maintain the transferor’s effective control over transferred financial assets unless it has a fixed or determinable price and is sufficiently deep-in-the-money when written in such a way that it is probable that the transferee will exercise the option and require the transferor to repurchase the transferred financial assets. In these circumstances, regardless of whether the assets are readily obtainable, effective control is maintained by the transferor because the option is considered to provide a more than trivial benefit.

(i) ASC 860-10-20 defines an attached call option as “[a] call option held by the transferor of a financial asset that becomes part of and is traded with the underlying instrument. Rather than being an obligation of the transferee, an attached call option is traded with and diminishes the value of the underlying instrument transferred subject to that call option.” An attached call option is not an option originally embedded in a financial asset by the issuer of the financial asset; rather, such an option is created by the transferor as part of a transfer of financial assets (i.e., the transferor attaches a call option to a transferred financial asset).

(j) ASC 860-10-20 defines an embedded call option as “[a] call option held by the issuer of a financial instrument that is part of and trades with the underlying instrument. For example, a bond may allow the issuer to call it by posting a public notice well before its stated maturity that asks the current holder to submit it for early redemption and provides that interest ceases to accrue on the bond after the early redemption date. Rather than being an obligation of the initial purchaser of the bond, an embedded call option trades with and diminishes the value of the underlying bond.”

No(b)

Yes(d)

No(b)

Generally, no(e)

Yes(c)

Yes(c)

Yes(d)

A conditionally exercisable freestanding call option on beneficial interests generally does not preclude sale accounting under ASC 860-10-40-5(b) or ASC 460-10-40-5(c). Once the condition is resolved and the transferor controls the ability to exercise the option, it is evaluated as a unilaterally exercisable freestanding call option on beneficial interests.

No(g)

Generally, no(h)

No(g)

No(h)

Generally, no(g)

Generally, no(h)

No(g)

No(h)

A conditionally exercisable freestanding put option on beneficial interests generally does not preclude sale accounting under ASC 860-10-40-5(b) or ASC 460-10-40-5(c). Once the condition is resolved and the option becomes exercisable by the transferee, it is evaluated as a unilaterally exercisable freestanding put option on beneficial interests. The evaluation of whether the option is deep-in-the-money is performed as of the date sale accounting is achieved and not on the date the exercise condition is resolved.

Whether unilaterally or conditionally exercisable, an attached call option does not constrain a third-party beneficial interest holder since it is able to pledge or exchange the interest and obtain substantially all of the interest’s economic benefits.

Attached call options on beneficial interest are analyzed as indirect attached call options on the transferred financial assets underlying the beneficial interest. An attached call option is related to specific beneficial interests. Since the call is attached by the transferor, regardless of the exercise price (i.e., fair value or not fair value) and whether the beneficial interest is readily obtainable, the call presumptively provides a more than trivial benefit to the transferor. Therefore, with one exception, an attached call option that gives the transferor the unilateral ability to cause a third-party beneficial interest holder to return it maintains effective control over the transferred financial assets underlying the beneficial interest. This is the case even if the transferor cannot obtain direct access to those transferred financial assets. If an attached call option has a fixed purchase price and the option is so far out-of-the-money when written that it is probable that the transferor would not exercise it, the option would not provide the transferor with a more than trivial benefit and therefore would not preclude the condition in ASC 860-10-40-5(c) from being met.

A conditionally exercisable attached call option on a beneficial interest does not preclude sale accounting under ASC 860-10-40-5(c) if the transferor does not control the ability to exercise the option. Once the condition is resolved and the transferor controls the ability to exercise the option, it is evaluated as a unilaterally exercisable attached call option on a beneficial interest. The evaluation of whether a fixed-price attached call option is deep-out-of-the-money should be performed as of the date sale accounting is achieved and not on the date the exercise condition is resolved.

Whether unilaterally or conditionally exercisable, an attached put option on a beneficial interest in transferred financial assets does not constrain the holder of the beneficial interest because it can pledge or exchange the interest and obtain substantially all of its economic benefits. A unilaterally exercisable attached put option on a beneficial interest does not maintain the transferor’s effective control over transferred financial assets unless the option has a fixed price and is so far in-the-money when written that it is probable that the beneficial interest holder will exercise it and require the transferor to repurchase the beneficial interest. If this condition does exist, the put option maintains the transferor’s effective control over the transferred financial assets regardless of whether the beneficial interest is readily obtainable.

N/A. A call option embedded in a beneficial interest issued by a securitization or asset-backed financing entity is analyzed as an attached call option.

A transferor always maintains effective control over transferred financial assets when any of the following conditions are met:

• The transferor has a unilateral right to redeem a beneficial interest in transferred financial assets that was received as proceeds from a transfer and, upon such redemption, the transferor can reclaim specific transferred financial assets. In this circumstance, the transferor would maintain effective control over the specific financial assets that it can reclaim.
• The transferor has the unilateral ability to liquidate or dissolve a securitization or other asset-backed financing entity (e.g., such a right could exist in a residual interest owned by the transferor).
• The transferor has a unilateral right to direct a securitization or asset-backed financing entity to dispose of specific financial assets, the transferor holds a residual interest in the entity, and the transferor is able to bid on the assets.
• A securitization or asset-backed financing entity must be liquidated before the maturity of the transferred financial assets, the transferor holds a residual interest in the entity, and the transferor is able to bid on the assets.

(a) ASC 860-10-20 defines a freestanding call option as “[a] call option that is neither embedded in nor attached to an asset subject to that call option.” Generally, call options on beneficial interests are attached options because they are part of, and are transferred with, the beneficial interests. A call option on a beneficial interest is a freestanding option only if it is a contract between the transferor and a specific third-party beneficial interest holder and is not part of, and would not be transferred with, the beneficial interest. In this table, it is assumed that any call option held by a transferor on third-party beneficial interests is not a cash-settled option or a cleanup call option. Net-cash-settled options on third-party beneficial interests do not preclude sale accounting under ASC 860-10-40-5(b) or (c). (An option whose settlement requires a securitization or asset-backed financial entity to sell transferred financial assets is not considered a cash-settled option.) Cleanup call options do not preclude the condition in ASC 860-10-40-5(b) or (c) from being met.

(b) A unilaterally exercisable freestanding call option on a beneficial interest is evaluated as an indirect call option on the transferred financial assets underlying that beneficial interest. A unilaterally exercisable freestanding call option on a readily obtainable beneficial interest does not constrain the transferee because it can otherwise acquire the beneficial interest in the marketplace. In practice, beneficial interests in securitized transferred financial assets are rarely considered readily obtainable.

(c) A unilaterally exercisable freestanding call option on a beneficial interest is evaluated as an indirect call option on the transferred financial assets underlying the beneficial interest. A unilaterally exercisable freestanding call option on a non-readily-obtainable beneficial interest conveys a more than trivial benefit to the transferor and constrains the holder from pledging or exchanging its interest because it might have to default if the call option was exercised and the interest had been pledged or exchanged. If the option has a fixed or determinable price, there is a potential economic benefit to the transferor unless the option is so far out-of-the-money when written that it is probable that the transferor would not exercise it. If the option has an exercise price equal to the fair value of the beneficial interest when purchased, it provides a more than trivial benefit because the transferor is able to obtain an asset that is not readily obtainable, always knows who holds the asset, and can prevent the asset from being obtained by a competitor.

(d) A unilaterally exercisable freestanding call option on a beneficial interest is evaluated as an indirect call option on the transferred financial assets underlying that beneficial interest. A unilaterally exercisable freestanding call option that permits the transferor to cause the holder to return its beneficial interest (regardless of whether it is readily obtainable) provides a more than trivial benefit if the option has a fixed or determinable price unless the option is so far out-of-the-money when written that it is probable that the transferor would not exercise it. A freestanding call option that permits the transferor to cause the return of a specific non-readily-obtainable beneficial interest provides a more than trivial benefit if the option’s exercise price is equal to the fair value of the beneficial interest when purchased because the transferor is able to obtain an asset that is not readily obtainable, always knows who holds the beneficial interest, and can prevent the asset from being obtained by a competitor.

(e) A unilaterally exercisable freestanding call option on a beneficial interest is evaluated as an indirect call option on the transferred financial assets underlying that beneficial interest. A unilaterally exercisable freestanding call option that permits the transferor to cause the holder to return a readily obtainable beneficial interest by paying fair value for such an interest when purchased does not provide a more than trivial benefit to the transferor unless the transferor also owns a residual interest in the transferred financial assets. In practice, beneficial interests in securitized transferred financial assets are rarely considered readily obtainable.

(f) Generally, put options on beneficial interests are attached options because they are part of, and are transferred with, the beneficial interests. A put option on a beneficial interest is a freestanding option only if it is a contract between the transferor and a specific third-party beneficial interest holder and is not part of, and would not be transferred with, the beneficial interest. In this table, it is assumed that any freestanding put option held by a third-party beneficial interest holder that allows it to require the transferor to repurchase its interest is not a cash-settled put option. Net-cash-settled options do not preclude sale accounting under ASC 860-10-40-5(b) or ASC 460-10-40-5(c). (An option whose settlement requires a securitization or asset-backed financial entity to sell transferred financial assets is not considered a cash-settled option.)

(g) A unilaterally exercisable freestanding put option on a beneficial interest is evaluated as an indirect put option on the transferred financial assets underlying that beneficial interest. Regardless of its price (i.e., fair value or not fair value), a unilaterally exercisable freestanding put option held by a third-party beneficial interest holder on readily obtainable beneficial interests does not constrain the holder because it can pledge or exchange the interest and still exercise the put option by otherwise acquiring the interests in the marketplace. In practice, beneficial interests in securitized financial assets are rarely readily obtainable. A unilaterally exercisable freestanding put option held by a third-party beneficial interest holder on non-readily-obtainable beneficial interests also generally does not constrain the transferee because it can always pledge or exchange the interests since it does not have to exercise the put option. However, if the put option’s exercise price is fixed or determinable and is sufficiently deep-in-the-money when written such that it is probable that it will be exercised, the option constrains the transferee from pledging or exchanging its interests because it would have to hold the interests to exercise the put option. The transferor obtains a more than trivial benefit since it has access to assets that are not readily obtainable, always knows who holds the interests, and can prevent them from being obtained by a competitor.

(h) A unilaterally exercisable freestanding put option on a beneficial interest is evaluated as an indirect put option on the transferred financial assets underlying that beneficial interest. A unilaterally exercisable put option held by a beneficial interest holder does not cause the transferor to maintain effective control over the transferred financial assets unless the option is fixed-price and sufficiently deep-in-the-money when written in such a way that it is probable that the holder will exercise the option and require the transferor to repurchase the beneficial interest. In these circumstances, regardless of whether the beneficial interests are readily obtainable, effective control is maintained by the transferor because the option is considered to provide a more than trivial benefit.

(i) ASC 860-10-20 defines an attached call option as “[a] call option held by the transferor of a financial asset that becomes part of and is traded with the underlying instrument. Rather than being an obligation of the transferee, an attached call option is traded with and diminishes the value of the underlying instrument transferred subject to that call option.” An attached call option is created by the transferor as part of a transfer of financial assets to a securitization or asset-backed financing entity.