4.2 Recognition of a Sale of Financial Assets
4.2.1 Derecognition of Assets Sold and Recognition of Proceeds
4.2.1.1 General
ASC 860-20
25-1 Section
860-20-40 provides derecognition guidance a transferor
(seller) applies upon completion of a transfer of
financial assets that satisfies paragraph 860-10-40-5’s
conditions to be accounted for as a sale. Upon
completion of such a transfer, the transferor (seller)
shall also recognize any assets obtained or liabilities
incurred in the sale, including, but not limited to, any
of the following:
- Cash
- Servicing assets
- Servicing liabilities
- In a sale of an entire
financial asset or a group of entire financial
assets, any of the following:
- The transferor’s beneficial interest in the transferred financial assets
- Put or call options held or written (for example, guarantee or recourse obligations)
- Forward commitments (for example, commitments to deliver additional receivables during the revolving periods of some securitizations)
- Swaps (for example, provisions that convert interest rates from fixed to variable).
See Examples 1, 2, and 5 (paragraphs 860-20-55-43 through
55-59) for illustration of this guidance.
25-3 The
transferee shall recognize all assets obtained
(including any participating interest(s) obtained) and
any liabilities incurred.
Assets Obtained and Liabilities Incurred as
Proceeds
25-4 The
proceeds from a sale of financial assets consist of the
cash and any other assets obtained, including beneficial
interests and separately recognized servicing assets, in
the transfer less any liabilities incurred, including
separately recognized servicing liabilities. Any asset
obtained is part of the proceeds from the sale. Any
liability incurred, even if it is related to the
transferred financial assets, is a reduction of the
proceeds. Any derivative financial instrument entered
into concurrently with a transfer of financial assets is
either an asset obtained or a liability incurred and
part of the proceeds received in the transfer.
30-1 The
transferor shall initially measure at fair value any
asset obtained (or liability incurred) and recognized
under paragraph 860-20-25-1.
30-2 The transferee shall
initially measure, at fair value, any asset or liability
recognized under paragraph 860-20-25-3, unless it is a
purchased financial asset with credit deterioration or
is a beneficial interest that meets the criteria in
paragraph 325-40-30-1A, in which case the transferee
shall apply the guidance in Topic 326 on measurement of
credit losses to determine the initial amortized cost
basis.
Sale of a Participating Interest
40-1A Upon
completion of a transfer of a participating interest
that satisfies the conditions in paragraph 860-10-40-5
to be accounted for as a sale, the transferor (seller)
shall:
- Allocate the previous carrying
amount of the entire financial asset between both
of the following on the basis of their relative
fair values at the date of the transfer:
- The participating interest(s) sold
- The participating interest that continues to be held by the transferor.
- Derecognize the participating interest(s) sold
- Apply the guidance in paragraphs 860-20-25-1 and 860-20-30-1 on recognition and measurement of assets obtained and liabilities incurred in the sale
- Recognize in earnings any gain or loss on the sale
- Report any participating
interest(s) that continue to be held by the
transferor as the difference between the following
amounts measured at the date of the transfer:
- The previous carrying amount of the entire financial asset
- The amount derecognized.
Pending Content (Transition Guidance: ASC
815-20-65-6)
40-1A Upon completion of a transfer of a
participating interest that satisfies the
conditions in paragraph 860-10-40-5 to be
accounted for as a sale, the transferor (seller)
shall:
- Allocate the previous carrying amount of the
entire financial asset between both of the
following on the basis of their relative fair
values at the date of the transfer:
- The participating interest(s) sold
- The participating interest that continues to be held by the transferor.
-
Derecognize the participating interest(s) sold
-
Apply the guidance in paragraphs 860-20-25-1 and 860-20-30-1 on recognition and measurement of assets obtained and liabilities incurred in the sale
-
Recognize in earnings any gain or loss on the sale
-
Report any participating interest(s) that continue to be held by the transferor as the difference between the following amounts measured at the date of the transfer:
-
The previous carrying amount of the entire financial asset
-
The amount derecognized.
-
For the transfer of a participating interest in
a financial asset included in a closed portfolio
hedged in an existing portfolio layer method hedge
in accordance with Topic 815 on derivatives and
hedging, when applying the guidance in (a) through
(e) an entity shall not include any portion of the
hedge basis adjustment that is maintained on the
closed portfolio basis in accordance with
paragraphs 815-20-25-12A(b) and
815-25-35-1(c).
Sale of an Entire Financial Asset or Group of Entire
Financial Assets
40-1B Upon
completion of a transfer of an entire financial asset or
a group of entire financial assets that satisfies the
conditions in paragraph 860-10-40-5 to be accounted for
as a sale, the transferor (seller) shall:
- Derecognize the transferred financial assets
- Apply the guidance in paragraphs 860-20-25-1 and 860-20-30-1 on recognition and measurement of assets obtained and liabilities incurred in the sale
- Recognize in earnings any gain or loss on the sale
If the transferred financial asset was accounted for
under Topic 320 as available for sale before the
transfer, item (a) requires that the amount in other
comprehensive income be recognized in earnings at the
date of transfer.
Pending Content (Transition Guidance: ASC
815-20-65-6)
40-1B Upon completion of a transfer of
an entire financial asset or a group of entire
financial assets that satisfies the conditions in
paragraph 860-10-40-5 to be accounted for as a
sale, the transferor (seller) shall:
-
Derecognize the transferred financial assets
-
Apply the guidance in paragraphs 860-20-25-1 and 860-20-30-1 on recognition and measurement of assets obtained and liabilities incurred in the sale
- Recognize in earnings any gain or loss on the sale
If the transferred financial asset was
accounted for under Topic 320 as available for
sale before the transfer, item (a) requires that
the amount in other comprehensive income be
recognized in earnings at the date of transfer. If
the transferred financial asset was included in a
closed portfolio hedged in an existing portfolio
layer method hedge in accordance with Topic 815
before the transfer, when applying the guidance in
(a) through (c) an entity shall not include any
portion of the hedge basis adjustment that is
maintained on the closed portfolio basis in
accordance with paragraphs 815-20-25-12A(b) and
815-25-35-1(c).
A transferor accounts for a sale of financial assets by derecognizing the
carrying amounts of the transferred financial assets and recognizing the fair
value of all assets obtained or liabilities incurred in the sale. Any difference
between the carrying amount of the financial assets derecognized and the net
proceeds received in the sale (i.e., the fair value of the assets obtained less
the fair value of any liabilities incurred) is recognized in earnings as a gain
or loss on sale. Special consideration is required when a transfer involves the
sale of a participating interest. In such a transfer, the transferor must
allocate the previous carrying amount of the entire financial asset between the
participating interest sold and the interest that continues to be held by the
transferor in accordance with ASC 860-10-40-1A.
Although ASC 860-20-25-1 and ASC 860-20-25-4 discuss types of
assets obtained and liabilities incurred, these are only examples. ASC 860-20
requires that all assets obtained and all liabilities incurred (regardless of
their nature or form) be recognized by the transferor in a sale and initially
measured at fair value. The following are examples of assets that may be
received and liabilities that may be incurred in a transfer that meets the
conditions for sale accounting:1
- Servicing assets or liabilities (see Chapter 6).
- Beneficial interests in securitized financial assets, including IO strips in transferred financial assets (see Section 4.4.3).
- Contingently exercisable or settleable repurchase features.
- ROAPs.
- Cleanup call options (see Section 4.3.1.3).
- Call and put options.
- Forward commitments to transfer additional financial assets (see Section 4.4.8).
- Derivative assets or liabilities.
- Credit enhancements, guarantees, and other recourse obligations to the transferee (see Section 4.4.2).
These assets obtained and liabilities incurred must be recognized at fair value
as part of sale accounting for the transferred financial assets. They must be
classified and subsequently measured in accordance with other applicable U.S.
GAAP (e.g., ASC 320 for debt securities, ASC 325-40 for beneficial interests in
securitized financial assets, ASC 815-10 for derivatives, ASC 860-50 for
servicing assets and liabilities). See Section 4.4 for
discussion of the classification and subsequent measurement of assets obtained
and liabilities assumed in a sale of financial assets.
A transferee recognizes all assets obtained and all liabilities
incurred at fair value in accordance with ASC 860-20-30-2. Such assets and
liabilities are classified and subsequently measured in accordance with other
applicable U.S. GAAP. For entities that have adopted ASU 2016-01, the
guidance on purchased credit-deteriorated assets in ASC 326-20 may apply.
Section 4.4.9
discusses the accounting for acquired credit card receivables. If a transferee
has a nonderivative option to acquire securities that will be within the scope
of ASC 320 and that option contract has all the characteristics in ASC
815-10-15-141 (i.e., an instrument within the scope of the “Certain Contracts on
Debt and Equity” subsections of ASC 815-10), the subsequent-measurement guidance
in ASC 815-10-35-5 will apply. Under ASC 815-10-35-5, if such an option expires
as worthless and the transferee subsequently purchases the same debt security in
the market, the purchased debt security must be recorded at its market price
plus the remaining unamortized premium related to the expired option, if
any.
4.2.1.2 Trade-Date Versus Settlement-Date Accounting
4.2.1.2.1 General
ASC 860-20
25-2 Although
a transfer of securities may not be considered to
have reached completion until the settlement date,
this Subtopic does not modify other generally
accepted accounting principles (GAAP) that require
accounting at the trade date for certain contracts
to purchase or sell securities.
4.2.1.2.2 Transferor’s Accounting
The transferor’s accounting for sales of financial assets on a trade-date or
settlement-date basis depends on the type of financial asset sold and
certain industry practices. Except for certain sales of securities and sales
of derivative instruments, entities generally recognize sales of financial
assets, including those sold in securitization transactions, on a
settlement-date basis. For example, settlement-date accounting is generally
applied to sales of loan receivables by financial services entities.
In certain industries, sales involving regular-way security trades (and
certain other regular-way trades of financial assets) are recognized on a
trade-date basis. For example, broker-dealers (see ASC 940-320- 25-1),
depository and lending entities (see ASC 942-325-25-2), investment companies
(ASC 946-320- 25-1), and defined benefit and defined contribution plans (see
ASC 960-325-25-1 and ASC 962-325-25-1) are required to apply trade-date
accounting to sales of securities on a regular-way basis. If the basis for
recognizing security sales is not specifically addressed in U.S. GAAP,
entities can elect an accounting policy. However, no entity should apply
trade-date accounting to a sale of a security that is not made on a
regular-way basis or if there are any conditions before closing that have
not been met. In addition, there may be industry-prescribed exceptions for
certain transactions (e.g., ASC 946-320-25-2 and 25-3 address private
placements and tender offers).
Sales of derivative instruments are generally accounted for on the trade date
by all entities.
4.2.1.2.3 Transferee’s Accounting
The transferee’s accounting for purchases of financial assets on a trade-date
or settlement-date basis depends on the type of financial asset purchased
and certain industry practices. Except for certain purchases of securities
and purchases of derivative instruments, entities generally recognize
purchases of financial assets on a settlement-date basis. For example,
settlement-date accounting is generally applied to purchases of loan
receivables by financial services entities.
In certain industries, purchases involving regular-way security trades (and
certain other regular-way trades of financial assets) are recognized on a
trade-date basis. For example, broker-dealers (see ASC 940-320-25-1),
depository and lending entities (see ASC 942-325-25-2), investment companies
(ASC 946-320-25-1), and defined benefit and defined contribution plans (see
ASC 960-325-25-1 and ASC 962-325-25-1) are required to apply trade-date
accounting to purchases of securities on a regular-way basis. If the basis
for recognizing security purchases is not specifically addressed in U.S.
GAAP, entities can elect an accounting policy. However, no entity should
apply trade-date accounting to a purchase of a security that is not made on
a regular-way basis or if there are any conditions before closing that have
not been met. In addition, there may be industry-prescribed exceptions for
certain transactions (e.g., ASC 946-320-25-2 and 25-3 address private
placements and tender offers).
Purchases of derivative instruments are generally accounted for on the trade
date by all entities.
4.2.1.3 Transaction Costs
4.2.1.3.1 General
ASC 860-20
Transaction Costs
35-10
Transaction costs relating to a sale of the
receivables may be recognized over the initial and
reinvestment periods in a rational and systematic
manner unless the transaction results in a loss.
Transaction costs for a past sale are not an asset
and thus are part of the gain or loss on sale. In a
credit card securitization, however, some of the
transaction costs incurred at the outset relate to
the future sales that are to occur during the
revolving period, and thus can qualify as an
asset.
4.2.1.3.2 Transferor’s Accounting
Transaction costs incurred in a sale of financial assets
(including those sold in securitization transactions) that represent costs
incurred in a single transaction should be treated as a reduction of the
proceeds of the transfer (i.e., they factor into the gain or loss on sale).
There is no basis for capitalizing transaction costs in a sale of financial
assets unless the transfer involves a securitization structure that features
ongoing, multiple sales (e.g., a revolving-period securitization). In these
situations, ASC 860-20-35-10 indicates that “[t]ransaction costs . . . may
be recognized over the initial and reinvestment periods in a rational and
systematic manner unless the transaction results in a loss.” If a loss is
incurred on the initial transfer or on contractually expected transfers,
however, third-party transaction costs should be expensed as incurred. See
Section
4.4.8 for further discussion of revolving-period
securitizations.
If a transferor obtains assets other than cash as proceeds
in a sale of financial assets, those noncash assets should be recognized at
fair value in accordance with ASC 860-20-30-1. Similarly, liabilities
incurred in conjunction with a sale of financial assets are also initially
measured at fair value in accordance with ASC 860-20-30-1. The initial
measurement of those assets and liabilities should not include any
transaction costs incurred in the sale because ASC 820 indicates that
transaction costs are not an attribute of the fair value of an asset or
liability and, as stated above, transaction costs reduce the net proceeds
received and factor into the gain or loss on sale.
The accounting above does not apply to transactions that are accounted for as
secured borrowings. See Section 5.2.5 for discussion of
the accounting for transaction costs associated with secured borrowings.
4.2.1.3.3 Transferee’s Accounting
Entities should consider other Codification topics in
accounting for transaction costs incurred in a purchase of financial assets.
Although transaction costs are recognized in earnings as incurred for
purchased financial assets that are subsequently measured at fair value
through earnings, immediate recognition of transaction costs in earnings may
not be appropriate when the investor subsequently measures a purchased
financial asset by using an attribute other than fair value through
earnings. For example, when a debt security is classified as held to
maturity (i.e., accounted for subsequently at amortized cost), it is
appropriate to capitalize transaction costs as part of the cost of the
asset.
Furthermore, some Codification topics require subsequent recognition of a
financial asset at fair value less costs to sell (i.e., the subsequent
measurement of the asset is reduced by the anticipated costs of selling the
asset). Thus, both the transaction costs incurred to acquire the financial
asset and those that will be incurred to sell the financial asset may be
recognized in earnings while the entity owns the asset. The subsections
below discuss other Codification topics (not all-inclusive) that address the
accounting for transaction costs incurred to purchase financial assets.
4.2.1.3.3.1 Debt Securities
Under ASC 320, an entity may classify investments in debt securities as
held to maturity, available for sale, or trading. The table below
discusses the accounting for transaction costs incurred when a debt
security is acquired.
Table 4-1
Accounting for Transaction Costs Incurred in
Connection With Acquiring a Debt Security
| |
---|---|
Classification of Security
|
Accounting for Transaction Costs
|
Held to maturity
|
Capitalized. In accordance with ASC 310-20-15-2
and 15-3, nonrefundable fees and costs associated
with acquiring debt securities classified as held
to maturity are within the scope of ASC 310-20.
ASC 310-20-30-5 states that the “initial
investment in a purchased loan or group of loans
shall include the amount paid to the seller plus
any fees paid or less any fees received.” Because
transaction costs associated with the acquisition
of held-to-maturity debt securities are within the
scope of ASC 320, fees paid to a third party that
are directly related to the acquisition (e.g.,
brokerage fees paid to a broker-dealer) would be
capitalized as part of the original carrying
amount. In accordance with ASC 310-20, entities
should separately expense any other costs incurred
in connection with acquiring securities (e.g.,
internal costs, portfolio management fees,
investment consultation, or due diligence costs
paid to an adviser).
Held-to-maturity debt securities are subsequently
measured at amortized cost and are subject to
evaluation for impairment.
|
Available for sale
|
Capitalized initially. In accordance with ASC
310-20-15-2 and 15-3, nonrefundable fees and costs
associated with acquiring debt securities
classified as available for sale are within the
scope of ASC 310-20. ASC 310-20-30-5 states that
the “initial investment in a purchased loan or
group of loans shall include the amount paid to
the seller plus any fees paid or less any fees
received.” Because transaction costs associated
with the acquisition of available-for-sale debt
securities are within the scope of ASC 320, fees
paid to a third party that are directly related to
the acquisition (e.g., brokerage fees paid to a
broker-dealer) would be capitalized as part of the
original carrying amount. In accordance with ASC
310-20, entities should separately expense any
other costs incurred in connection with acquiring
securities (e.g., internal costs, portfolio
management fees, investment consultation, or due
diligence costs paid to an adviser).
An entity must subsequently measure debt
securities classified as available for sale at
fair value, with changes in fair value recognized
in OCI (provided that there is no impairment).
This fair value should not include any transaction
costs because ASC 820 indicates that such costs
are not a characteristic of an asset or liability
measured at fair value. Therefore, entities will
immediately recognize an unrealized loss in OCI
after the purchase of a debt security classified
as available for sale. Given the security’s
classification as available for sale, such a loss
will be reported in AOCI unless the security is
subsequently impaired and measured at fair value
on the basis of the entity’s conclusion that it is
more likely than not that the security will be
sold or that there is an intent to sell it.
|
Trading
|
Expensed as incurred. ASC 820 indicates that
transaction costs are not a characteristic of an
asset or liability measured at fair value. ASC
310-20-15-3(c) states that ASC 310-20 does not
apply to securities that are subsequently measured
at fair value through earnings.
|
4.2.1.3.3.2 Equity Securities
Unless the measurement alternative in ASC 321-10-35-2 is applied or the
investment qualifies for the equity method of accounting, investments in
equity securities must be initially and subsequently recognized at fair
value, with changes in fair value reported in earnings. Since
transaction costs are not a characteristic of an asset measured at fair
value (see ASC 820-10-35-9B), unless the measurement alternative in ASC
321-10-35-2 is elected, transaction costs incurred to acquire an equity
security are immediately expensed. See Example
4-2.
ASC 321-10-35-2 indicates that when the measurement
alternative is applied to an equity security without a readily
determinable fair value, that security is measured at “cost minus
impairment, if any,” and adjustments are also made for “observable price
changes in orderly transactions for the identical or a similar
investment of the same issuer.” Thus, securities measured according to
this alternative are initially measured at the transaction price, which
includes incremental direct costs related to acquiring the security
(i.e., transaction costs). However, these capitalized transaction costs
would be subsequently expensed in earnings upon (1) a remeasurement
event under ASC 321, including an impairment or an observable price
decline (which represent fair value measurements under ASC 820); (2) a
sale of the security; or (3) a reclassification of the security to fair
value through earnings.
Equity method investments are generally initially measured on a cost
accumulation basis, which would include transaction costs. However,
there are exceptions to this general principle. ASC 323-10-30-2
addresses two situations in which an equity method investment is
initially recognized at fair value. In these circumstances, the initial
measurement should not include any transaction costs.
4.2.1.3.3.3 Investment Securities Owned by an Investment Company
ASC 946-320-35-1 states that “[a]n investment company
shall measure investments in debt and equity securities subsequently at
fair value.” In addition, ASC 946-320-30-1 states that “[a]n investment
company shall initially measure its investments in debt and equity
securities at their transaction price. The transaction price shall
include commissions and other charges that are part of the purchase
transaction.” According to this guidance, investment companies initially
recognize investments in debt and equity securities at the transaction
price, including related commissions and other direct costs incurred in
connection with acquisition of the securities (i.e., an entry price and
not fair value), and subsequently measure the investments at fair value
under ASC 820. If any other potential differences between entry and exit
prices are ignored, the capitalization of transaction costs into the
initial measurement of investment securities by investment companies
will result in a loss on initial recognition. For example, assume that
Mutual Fund X purchases a publicly traded equity security for $99
immediately before the market closing (the fair value is therefore also
$99). Further assume that X incurred a $1 commission in purchasing the
security. Under ASC 946, the initial cost basis is $100 ($99 plus the $1
transaction cost). The fair value would be $99; therefore, a $1 loss
would be recognized on the acquisition date. This loss on initial
recognition is presented as a “net unrealized appreciation
(depreciation) on investments” rather than as a separate expense in the
investment company’s statement of operations.
Some have questioned whether ASC 820’s exit price notion
and guidance indicating that transaction costs are not a characteristic
of an asset measured at fair value conflict with the guidance in ASC
946-320-30-1. The implication is that investment companies would not be
permitted to present transaction costs as part of the net change in
unrealized appreciation (depreciation) on investments. However, we
believe that investment companies that apply ASC 946 should present
commissions and other charges that are directly related to the
acquisition of investment securities in the net change in unrealized
appreciation (depreciation) on investments. ASC 820-10-35-9B states, in
part, “[t]ransaction costs shall be accounted for in accordance with
other Topics.” ASC 946-320-30-1 specifies that the initial amount
recorded for investment purchases “shall include commissions and other
charges that are part of the purchase transaction.” ASC 820 does not
affect this guidance. Accordingly, ASC 946 continues to require
investment companies to include commissions and other charges incurred
as part of securities purchase transactions in the net change in
unrealized appreciation (depreciation) on investments. After initial
recognition, an investment company measures its investment at the exit
price in accordance with ASC 820. The difference between the initial
recognized amount and subsequent fair value measurement would be
presented as a net unrealized appreciation (depreciation) on investments
rather than as a separate expense in the statement of operations.
4.2.1.3.3.4 Plan Assets of Pension and Other Postretirement Benefit Plans
The fair value measurement of investments held by a pension or other
postretirement plan should be reduced by the costs of disposing of the
assets. ASC 715-30-35-50 states, in part:
The fair value of an
investment shall be reduced by brokerage commissions and other costs
normally incurred in a sale if those costs are significant (similar
to fair value less cost to sell).
4.2.1.3.3.5 Financial Assets Measured at the Lower of Cost or Fair Value
Certain Codification topics require that financial
assets be measured at the lower of cost or fair value. Those
Codification topics specify whether the fair value measurement should be
reduced for transaction costs. For example, under ASC 310-10-35-48,
nonmortgage loans classified as HFS must be reported at the lower of
amortized cost or fair value. ASC 310-10-35-48 does not indicate that
fair value should be reduced for anticipated costs to sell. Conversely,
under ASC 326-20-35-4, when an HFI-classified loan receivable is
measured for impairment on the basis of the fair value of the collateral
and repayment of the loan depends on the sale of the collateral,
impairment measurement must be based on fair value less costs to
sell.
4.2.2 Examples
The following two examples in ASC 860-20 illustrate the initial measurement of
proceeds and other liabilities in a transfer of financial assets that meets the
conditions for sale accounting:
ASC 860-20
Example 1: Recording Transfers With Proceeds of Cash,
Derivative Instruments, and Other
Liabilities
55-43 This
Example illustrates the guidance in paragraphs 860-20-25-1
and 860-20-30-1. Entity A transfers entire loans with a
carrying amount of $1,000 to an unconsolidated
securitization entity and receives proceeds with a fair
value of $1,030, and the transfer is accounted for as a
sale. Entity A undertakes no obligation to service and
assumes a limited recourse obligation to repurchase
delinquent loans. Entity A agrees to provide the transferee
a return at a variable rate of interest even though the
contractual terms of the loan are fixed rate in nature (that
provision is effectively an interest rate swap).
55-44 This
Example has the following assumptions.
55-45 The
following journal entry is made by Entity A.
Example 2: Recording Transfers of Participating
Interests
55-46 This
Example illustrates the guidance in paragraph 860-20-25-1.
This Example assumes the conditions for a sale in paragraph
860-10-40-5 are met. Entity B transfers a nine-tenths
participating interest in a loan with a fair value of $1,100
and a carrying amount of $1,000, and the transfer is
accounted for as a sale. The servicing contract has a fair
value of zero because Entity B estimates that the benefits
of servicing are just adequate to compensate it for its
servicing responsibilities.
55-47 This
Example has the following assumptions.
55-48 The
following journal entry is made by Entity B.
Below is another example illustrating initial recognition in a securitization
transaction accounted for as a sale.
Example 4-1
Securitization With Servicing Rights Retained
Entity A transfers mortgage loans to an SPE that issues
beneficial interests to third parties. Entity A retains an
IO strip and will continue to service the transferred loans.
The details of the transaction, as well as the calculation
and journal entries associated with the transfer, are shown
below. For simplicity, this example excludes (1)
consideration of the need for a two-step transfer, as
discussed in ASC 860-10-55-22 and 55-23, and (2) an
evaluation of the IO strip under ASC 815.
The following example illustrates
the transferee’s accounting for transaction costs incurred in the purchase of equity
securities:
Example 4-2
Acquisition of Equity
Security Subsequently Accounted for at Fair
Value
An entity acquires an investment in an
exchange-traded equity security on December 31, 20X7. The
asset will be accounted for at fair value through earnings
on a recurring basis in accordance with ASC 321. The entity
paid $100 for the security (which was also the security’s
closing price), plus a $1 broker commission, for a total
transaction price of $101. The entity transacted in its
principal market for the security. However, in accordance
with ASC 820-10-30-3A(c), the entity determines that the
transaction price does not represent fair value at initial
recognition because of the transaction costs. The closing
price on December 31, 20X7, is $100. If A were to
subsequently sell the security, it would incur a $1 broker
commission.
The fair value of the security as of the
December 31, 20X7, reporting date is the security’s $100
closing price. Since ASC 321 does not indicate otherwise,
the entity should record a $1 expense for the broker
commission paid to acquire the security. The broker
commission is not a characteristic of the security and does
not add value to it. Transaction costs are a separate unit
of account and therefore do not enter into the fair value
measurement of the security. The $1 broker commission
indicates that the transaction price of $101 is not fair
value at inception. Another market participant would not
reimburse the entity for the broker commission; instead, it
would pay the entity the closing market price of $100 for
the security. In a manner consistent with ASC 820-10-35-9B
and Example 4 in ASC 820-10-55-42 through 55-45A, the entity
should not adjust the security for the $1 broker commission
it would incur to sell the security. In other words, the
entity should not write down the security to $99 (the net
proceeds it would receive upon selling the security).
Footnotes
1
In this list, it is assumed that sale accounting is not
precluded for the assets and liabilities.