4.5 Presentation and Disclosure

4.5.1 General

ASC 860-20

50-2 Paragraphs 860-20-50-3 through 50-4 address disclosures for securitizations, asset-backed financing arrangements, and similar transfers that have both of the following characteristics:

The transfer is accounted for as a sale
The transferor has continuing involvement with the transferred financial assets.

50-2A If specific disclosures are required for a particular form of a transferor’s continuing involvement by other Topics, the transferor shall provide the information required in paragraphs 860-20-50-3(b) through (cc) and 860-20-50-4(a) with a cross-reference to the separate notes to financial statements so a financial statement user can understand the risks retained in the transfer. The entity does not need to provide each specific disclosure required in paragraphs 860-20-50-3(d) and 860-20-50-4 if the disclosure is not required by other Topics and the objectives of paragraphs 860-10-50-3 through 50-4 are met. For example, if the transferor’s only form of continuing involvement is a derivative, the entity shall provide the disclosures required in paragraphs 860-20-50-3(b) through (cc) and 860-20-50-4(a) and the disclosures about derivatives required by applicable Topics. In addition, the entity shall evaluate whether the other disclosures in paragraphs 860-20-50-3 through 50-4 are necessary for the entity to meet the objectives in those paragraphs.

ASC 860-20-50-2 and 50-2A give an overview of the disclosures required by ASC 860-20 for each income statement and each balance sheet period presented for transfers that are accounted for as sales for which the transferor has continuing involvement with the transferred financial assets. If an entity securitizes financial assets and has a variable interest in the securitization entity, it should provide the disclosures required by both ASC 860-20-50 and ASC 810-10-50. This information may be disclosed in more than one note to the financial statements as long as the overall disclosure objectives are met.

SEC Considerations

The staff of the SEC’s Division of Corporation Finance has objected to entities that disclosed securitization transactions that are accounted for as sales on a “managed basis” (i.e., as if those sales had been accounted for as secured borrowings) unless management uses such measures to evaluate segment performance and an entity appropriately discloses them in its segment disclosures. Otherwise, the SEC believes that it is inappropriate for a registrant to disclose interest revenues and interest expense, and to remove gains or losses on sales, as if derecognized financial assets were accounted for as secured borrowings. These disclosures would not be considered permissible non-GAAP disclosures when they are provided to smooth earnings.

4.5.2 Income Statement

ASC 860-20

Disclosures for Each Income Statement Presented

50-3 For each income statement presented, the entity shall disclose all of the following:

a. Subparagraph superseded by Accounting Standards Update No. 2009-16.

b. The characteristics of the transfer including all of the following:

A description of the transferor’s continuing involvement with the transferred financial assets
The nature and initial fair value of both of the following:
1. The asset obtained as proceeds
2. The liabilities incurred in the transfer.
The gain or loss from sale of transferred financial assets.

bb. For the initial fair value measurements in item (b)(2), the level within the fair value hierarchy in Topic 820 in which the fair value measurements fall, segregating fair value measurements using each of the following:

Quoted prices in active markets for identical assets or liabilities (Level 1)
Significant other observable inputs (Level 2)
Significant unobservable inputs (Level 3).

c. For the initial fair value measurements in item (b)(2), the key inputs and assumptions used in measuring the fair value of assets obtained and liabilities incurred as a result of the sale that relate to the transferor’s continuing involvement, including quantitative information about all of the following:

Discount rates.
Expected prepayments including the expected weighted-average life of prepayable financial assets. The weighted-average life of prepayable assets in periods (for example, months or years) can be calculated by multiplying the principal collections expected in each future period by the number of periods until that future period, summing those products, and dividing the sum by the initial principal balance.
Anticipated credit losses, including expected static pool losses.

If an entity has aggregated transfers during a period in accordance with the guidance beginning in paragraph 860-10-50-5, it may disclose the range of assumptions.

cc. For the initial fair value measurements in item (b)(2), the valuation technique(s) used to measure fair value.

d. Cash flows between a transferor and transferee, including all of the following:

Proceeds from new transfers
Proceeds from collections reinvested in revolving-period transfers
Purchases of previously transferred financial assets
Servicing fees
Cash flows received from a transferor’s interests.

Disclosures for Each Statement of Financial Position Presented

50-4 For each statement of financial position presented, regardless of when the transfer occurred, an entity shall disclose all of the following:

a. Qualitative and quantitative information about the transferor’s continuing involvement with transferred financial assets that provides financial statement users with sufficient information to assess the reasons for the continuing involvement and the risks related to the transferred financial assets to which the transferor continues to be exposed after the transfer and the extent that the transferor’s risk profile has changed as a result of the transfer (including, but not limited to, credit risk, interest rate risk, and other risks), including all of the following:

The total principal amount outstanding
The amount that has been derecognized
The amount that continues to be recognized in the statement of financial position
The terms of any arrangements that could require the transferor to provide financial support (for example, liquidity arrangements and obligations to purchase assets) to the transferee or its beneficial interest holders, including both of the following:
1. A description of any events or circumstances that could expose the transferor to loss
2. The amount of the maximum exposure to loss.
Whether the transferor has provided financial or other support during the periods presented that it was not previously contractually required to provide to the transferee or its beneficial interest holders, including — when the transferor assisted the transferee or its beneficial interest holders in obtaining support — both of the following:
1. The type and amount of support
2. The primary reasons for providing the support.
An entity also is encouraged to disclose information about any liquidity arrangements, guarantees, or other commitments by third parties related to the transferred financial assets that may affect the fair value or risk of the related transferor’s interest.

aa. The entity’s accounting policies for subsequently measuring assets or liabilities that relate to the continuing involvement with the transferred financial assets.

b. The key inputs and assumptions used in measuring the fair value of assets or liabilities that relate to the transferor’s continuing involvement including, at a minimum, but not limited to, quantitative information about all of the following:

Discount rates
Expected prepayments including the expected weighted-average life of prepayable financial assets (see paragraph 860-20-50-3(c)(2))
Anticipated credit losses, including expected static pool losses, if applicable. Expected static pool losses can be calculated by summing the actual and projected future credit losses and dividing the sum by the original balance of the pool of assets.

If an entity has aggregated transfers during a period in accordance with the guidance beginning in paragraph 860-10-50-5, it may disclose the range of assumptions.

c. For the transferor’s interest in the transferred financial assets, a sensitivity analysis or stress test showing the hypothetical effect on the fair value of those interests (including any servicing assets or servicing liabilities) of two or more unfavorable variations from the expected levels for each key assumption that is reported under item (b) of this paragraph independently from any change in another key assumption.

d. A description of the objectives, methodology, and limitations of the sensitivity analysis or stress test.

e. Information about the asset quality of transferred financial assets and any other financial assets that it manages together with them. This information shall be separated between assets that have been derecognized and assets that continue to be recognized in the statement of financial position. This information is intended to provide financial statement users with an understanding of the risks inherent in the transferred financial assets as well as in other financial assets and liabilities that it manages together with transferred financial assets. For example, information for receivables shall include, but is not limited to both of the following:

Subparagraph superseded by Accounting Standards Update No. 2009-16.
Subparagraph superseded by Accounting Standards Update No. 2009-16.
Subparagraph superseded by Accounting Standards Update No. 2009-16.
Delinquencies at the end of the period
Credit losses, net of recoveries, during the period.

50-4A The disclosure requirement in paragraph 860-20-50-4D applies to transactions accounted for as a sale that comprise both of the following:

A transfer of financial assets to a transferee
An agreement entered into in contemplation of the initial transfer with the transferee that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. For purposes of this paragraph, an agreement entered into in contemplation of the initial transfer refers to transactions that depend on the execution of one another and that are entered into for the same business purpose.

50-4B The transactions described in paragraph 860-20-50-4A include both of the following types:

Transfers of financial assets with an agreement to repurchase the transferred financial asset (or a substantially-the-same financial asset) before maturity at a fixed or determinable price that will be settled in a form other than the return of the transferred financial asset (for example, the transaction is cash-settled)
Transfers of financial assets with an agreement that requires that the transferor retain substantially all of the exposure to the economic return on the transferred financial asset (for example, a sale with a total return swap).

50-4C The following items are not subject to the requirements in paragraph 860-20-50-4D:

Transfers of financial assets with an agreement to purchase another financial asset that is not substantially the same as the initial transferred financial asset in accordance with paragraph 860-10-40-24(a), for example, a dollar roll transaction accounted for as a sale because the financial asset to be purchased is not substantially the same as the initially transferred financial asset in accordance with paragraph 860-10-40-24(a)
Transactions described in paragraph 860-20-50-2 that are subject to the disclosures in paragraphs 860-20-50-3 through 50-4.

50-4D To provide an understanding of the nature of the transactions, the transferor’s continuing exposure to the transferred financial assets, and the presentation of the components of the transaction in the financial statements, an entity shall disclose the following for outstanding transactions at the reporting date that meet the scope guidance in paragraphs 860-20-50-4A through 50-4B by type of transaction (for example, repurchase agreement, securities lending transaction, and sale and total return swap) (except for those transactions that are excluded from the scope, as described in paragraph 860-20-50-4C):

The carrying amount of assets derecognized as of the date of derecognition:
1. If the amounts that have been derecognized have changed significantly from the amounts that have been derecognized in prior periods or are not representative of the activity throughout the period, a discussion of the reasons for the change shall be disclosed.
The amount of gross cash proceeds received by the transferor for the assets derecognized as of the date of derecognition.
Information about the transferor’s ongoing exposure to the economic return on the transferred financial assets:
1. As of the reporting date, the fair value of assets derecognized by the transferor.
2. Amounts reported in the statement of financial position arising from the transaction (for example, the carrying value or fair value of forward repurchase agreements or swap contracts). To the extent that those amounts are captured in the derivative disclosures presented in accordance with paragraph 815-10-50-4B, an entity shall provide a cross-reference to the appropriate line item in that disclosure.
3. A description of the arrangements that result in the transferor retaining substantially all of the exposure to the economic return on the transferred financial assets and the risks related to those arrangements.

ASC 860-20-50-4 addresses the disclosures that a transferor is required to provide for each balance sheet period for transfers of financial assets that are accounted for as sales for which the transferor has continuing involvement in the transferred financial assets. Note that the transferor must provide these disclosures in addition to the (1) recurring and nonrecurring fair value disclosures required by ASC 820 and (2) fair value disclosures for financial instruments not measured at fair value that public business entities must provide under ASC 825. See Chapter 11 of Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option) for further discussion of the disclosure requirements in ASC 820 and ASC 825.

SEC Considerations

ASC 860-20-50-4(b) requires disclosure of “[t]he key inputs and assumptions used in measuring the fair value of assets or liabilities that relate to the transferor’s continuing involvement including . . . quantitative information about . . . 1. [d]iscount rates[,] 2. [e]xpected prepayments including the expected weighted-average life of prepayable financial assets . . . [and] 3. [a]nticipated credit losses, including expected static pool losses.” ASC 860-20-50-4(c) also requires disclosure of “a sensitivity analysis or stress test showing the hypothetical effect on the fair value of those interests (including any servicing assets or servicing liabilities) of two or more unfavorable variations from the expected levels for each key assumption.” The sensitivity of a particular key assumption should be calculated independently from changes in other key assumption.

In a speech8 at the 2000 AICPA Conference on SEC Developments, an SEC staff member stated the following, in part:

[ASC 860] states that the FASB chose not to specify the hypothetical changes in those assumptions that companies should select in preparing their sensitivity analyses. However, the FASB chose to require the selection of two or more pessimistic variations for each key assumption that would indicate whether or not the variation has a linear relationship to the assumption. Regardless of the pessimistic variations selected, the staff believes that the sensitivity disclosures should provide investors with transparent information to determine the pro forma effects of a change in market conditions on the registrant’s retained interests in securitized financial assets. Accordingly, the staff has not objected to the selection of a hypothetical change in assumptions that: (1) is expected to reflect reasonably possible near-term changes in those assumptions, for example a 10 percent adverse change; and (2) reflects significant deviations from those year-end market assumptions that are possible, but are not expected, to occur, sometimes referred to as outlier assumptions.

On the basis of past experience and the above view of the SEC staff, public companies generally should avoid using a hypothetical unfavorable variance of less than 10 percent in their sensitivity disclosures. In addition, the outlier hypothetical change generally should exceed 10 percent but remain within the realm of possibility.

ASC 860-20-55-108 illustrates an approach to the quantitative disclosure requirements in ASC 860-20-50-4D.

ASC 860-20

Example 11: Disclosure of Certain Transfers of Financial Assets Accounted for as Sales With Agreements That Result in the Transferor Retaining Substantially All of the Exposure to the Economic Return on the Transferred Financial Asset

55-108 This Example illustrates one approach for satisfying the quantitative disclosure requirements in paragraph 860-20-50-4D.

SEC Considerations

The valuation of and accounting for beneficial interests in securitized financial assets are significantly affected by the assumptions that are selected, such as prepayment speeds or anticipated credit losses. In periods of falling interest rates and corresponding greater-than-expected prepayments on the underlying financial assets (e.g., mortgage loans), entities that hold beneficial interests in securitized financial assets may record significant write-downs to the carrying amounts of such interests. ASC 860-20 requires extensive disclosures, including details about securitization assumptions and the sensitivity of beneficial interests in securitized financial assets to changes in assumptions. At the March 12, 1998, AICPA SEC Regulations Committee joint meeting with the SEC staff, the SEC staff also expressed its views on such disclosures and indicated the following:

Recognition of gains or losses on the sale of financial assets is not elective.
Assumptions used in estimating the fair value of beneficial interests must be consistent with market conditions. It is not appropriate for an entity to use assumptions that are inconsistent with current market conditions to ascribe intentionally low or high values to new or retained interests.
An entity should use consistent assumptions and methods in estimating the fair value of similar instruments. It would be inappropriate for an entity to use significantly different values or assumptions for new or retained interests that are similar.
An entity should disclose “[s]ignificant assumptions used in estimating the fair value of [beneficial interests] at the balance sheet date.” Significant assumptions generally include quantitative amounts or rates of default, prepayments, and interest.

Note that entities should also consider the guidance in ASC 820, which defines fair value, establishes a framework for measuring it, and includes disclosures about fair value measurements. For more information, see Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option).

4.5.3 Sales of Loans and Trade Receivables

ASC 860-20

Sales of Loans and Trade Receivables

50-5 The aggregate amount of gains or losses on sales of loans or trade receivables (including adjustments to record loans held for sale at the lower of cost or fair value) shall be presented separately in the financial statements or disclosed in the notes to financial statements. See Topic 310 for a full discussion of disclosure requirements for loans and trade receivables.

Pending Content (Transition Guidance: ASC 326-10-65-1)

50-5 The aggregate amount of gains or losses on sales of loans or trade receivables (including adjustments to record loans held for sale at the lower of amortized cost basis or fair value) shall be presented separately in the financial statements or disclosed in the notes to financial statements. See Topic 310 on receivables and Topic 326 on measurement of credit losses for a full discussion of disclosure requirements for loans and trade receivables.

ASC 860-20-50-5 requires a transferor to separately present in the income statement, or disclose, the aggregate amount of gains and losses on sales of loans or trade receivables. The example below illustrates the income statement classification of sales of trade receivables.

Example 4-7

Income Statement Classification of Sales of Trade Receivables

Entity F sells trade receivables to an unconsolidated securitization entity. Entity F accounts for the transfers as sales in accordance with ASC 860 and records a loss from the sale in earnings (net income), which economically represents interest (i.e., time value of money), potential credit losses, and other costs.

Entity F should not classify the losses on the sales of trade receivables as interest expense in its income statement. Such losses (costs) are not associated with a borrowing for accounting purposes and are therefore not interest expense. They are more akin to an “other operating expense” (similar to the losses on sales of other types of assets).

Footnotes

Although the SEC staff removed this speech from its Web site in late 2001, the guidance provided in the speech remains useful.

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