Chapter 5 — Secured Borrowing Accounting

5.3 Collateral in a Secured Borrowing

5.3.1 General

ASC 860-30 — Glossary

Collateral

Personal or real property in which a security interest has been given.

ASC 860-30

Cash Collateral

25-3 Transfers of financial assets in exchange for cash collateral cannot be distinguished from borrowing cash. Further, because cash is fungible, it is impossible to determine whether it has been used by the secured party. Accordingly, all cash collateral shall be recorded as an asset by the party receiving it (the secured party), together with a liability for the obligation to return it to the payer (obligor), whose asset is a receivable.

25-4 Cash collateral used, for example, in securities lending transactions (see paragraphs 860-10-05-16 through 05-18) shall be derecognized by the obligor and recognized by the secured party, not as collateral but rather as proceeds of either a sale or a borrowing. See paragraphs 860-30-25-6 through 25-9 for further discussion of recognition of cash and noncash collateral as proceeds of a transfer.

Noncash Collateral

25-5 The accounting for noncash collateral by the obligor (or debtor) and the secured party depends on whether the secured party has the right to sell or repledge the collateral and on whether the obligor has defaulted. Noncash collateral shall be accounted for as follows:

If the secured party (transferee) has the right by contract or custom to sell or repledge the collateral, then paragraph 860-30-45-1 requires that the obligor (transferor) reclassify that asset and report that asset in its statement of financial position separately (for example, as security pledged to creditors) from other assets not so encumbered.
If the secured party (transferee) sells collateral pledged to it, it shall recognize the proceeds from the sale and its obligation to return the collateral. The sale of the collateral is a transfer subject to the provisions of this Topic.
If the obligor (transferor) defaults under the terms of the secured contract and is no longer entitled to redeem the pledged asset, it shall derecognize the pledged asset as required by paragraph 860-30-40-1 and the secured party (transferee) shall recognize the collateral as its asset. (See paragraph 860-30-30-1 for guidance on the secured party’s initial measurement of collateral recognized. See paragraph 860-30-40-1 for further guidance if the debtor has sold the collateral.)
Except as provided in paragraph 860-30-40-1 the obligor (transferor) shall continue to carry the collateral as its asset, and the secured party (transferee) shall not recognize the pledged asset.

Cash or Securities Received as Proceeds

25-6 Paragraph 860-10-55-55A discusses securities lending transactions in which the criteria in paragraph 860-10-40-5 for a sale are met. The following guidance relates to securities lending or similar transactions in which a transferor (lender) transfers securities and receives either cash or securities as collateral and the transfer does not meet the sale criteria in that paragraph.

25-7 Many securities lending transactions are accompanied by an agreement that both entitles and obligates the transferor to repurchase or redeem the transferred financial assets before their maturity. Paragraph 860-10-40-24 states that 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), if all of the conditions in paragraph 860-10-40-24 are met. Those transactions shall be accounted for as secured borrowings, in which either cash or securities that the holder is permitted by contract or custom to sell or repledge received as collateral are considered the amount borrowed, the securities loaned are considered pledged as collateral against the cash borrowed and reclassified as set forth in paragraph 860-30-25-5(a), and any rebate paid to the transferee of securities is interest on the cash the transferor is considered to have borrowed.

25-8 In a securities lending transaction, the transferor of securities being loaned accounts for cash received in the same way whether the transfer is accounted for as a sale or a secured borrowing. Cash collateral or securities received as collateral that a securities lender is permitted to sell or repledge are the proceeds of a borrowing secured by them. The cash received shall be recognized as the transferor’s asset, as shall investments made with that cash, even if made by agents or in pools with other securities lenders, along with the obligation to return the cash. If securities that may be sold or repledged are received, the transferor of the securities being loaned accounts for those securities in the same way as it would account for cash received. See Example 1 (paragraph 860-30-55-1) for an illustration of a securities lending transaction that is accounted for as a secured borrowing in which cash collateral is transferred.

25-9 As noted in paragraphs 860-30-25-4 and 860-30-25-8, the collateral accounting provisions do not apply to cash, or securities that can be sold or pledged for cash, received as so-called collateral for noncash financial assets, for example, in certain securities lending transactions. Such cash or securities that can be sold or pledged for cash are accounted for as proceeds of either a sale or a borrowing.

Sales of Collateral Held

25-10 Obligations to return to the transferor assets borrowed and then sold have sometimes been effectively recognized as part of a liability for securities sold but not yet purchased, and this Section does not require any change in that practice.

Noncash Collateral

30-1 Noncash collateral recognized by the secured party as its asset under paragraph 860-30-25-5(c) that the secured party has not already sold shall be initially measured at fair value.

Pledged Assets Required to Be Reclassified

35-2 A transferor that has transferred collateral that must be reclassified in accordance with paragraph 860-30-25-5(a) (for example, as securities pledged to creditors) shall not change its measurement of that collateral. The transferor shall follow the same measurement principles as before the transfer. For example, securities reclassified from the available-for-sale category to securities pledged to creditors should continue to be measured at fair value, with changes in fair value reported in comprehensive income, while debt securities reclassified from the held-to-maturity category to securities pledged to creditors should continue to be measured at amortized cost. See Topic 320 for guidance related to measurement of investments in securities classified as available for sale and held to maturity.

Obligation to Return Transferred Collateral

35-3 This Section does not provide specific guidance on the subsequent measurement of the obligation to return transferred collateral. The liability to return the collateral shall be measured in accordance with other relevant accounting guidance. Paragraph 942-405-35-1 requires that a bank or savings institution that, as transferee, sells transferred collateral subsequently measure that liability like a short sale at fair value.

40-1 In circumstances where an obligor (transferor) transfers noncash collateral in a secured borrowing and the obligor (transferor) defaults under the terms of the secured contract and is no longer entitled to redeem the pledged asset, the obligor shall derecognize the pledged asset. If the secured party has already sold the collateral, the secured party shall derecognize its obligation to return the collateral.

40-2 Otherwise paragraph 860-30-25-5(c) addresses the secured party’s accounting for the collateral.

As discussed in Section 5.2.1, a transfer of financial assets subject to ASC 860-10 that does not meet the conditions for sale accounting must be accounted for by the transferor and transferee as a borrowing secured by a pledge of collateral. Each transfer that is accounted for as a secured borrowing has two components: (1) proceeds and (2) collateral.

The recognition and measurement guidance on cash and noncash collateral in ASC 860-30-25-3 through 25-10, ASC 860-30-30-1, ASC 860-30-35-2 and 35-3, and ASC 860-30-40-1 and 40-2 applies to all transfers accounted for as secured borrowings under ASC 860-10. However, the guidance in ASC 860-30-25 on recognition of collateral does not apply when the so-called collateral represents the proceeds in a secured borrowing. Proceeds in a secured borrowing include:

Cash.
Noncash financial assets (e.g., securities) that can be sold or repledged by the secured party.

The transferor and transferee account for cash payments and receipts in the same manner regardless of whether the transfer agreement defines cash as proceeds in a secured borrowing or collateral (see Section 5.3.2.1). The accounting for noncash financial assets depends on whether those assets are considered the proceeds in a secured borrowing or collateral (see Section 5.3.3.3.1).

5.3.2 Accounting for Cash in a Secured Borrowing

5.3.2.1 General

Depending on the terms of the legal agreement for the transfer, cash may be characterized as the proceeds from a sale of financial assets or as the collateral for a borrowing.10 However, this legal distinction is irrelevant since cash is fungible. Under ASC 860-30-25-3, in all circumstances in which one party transfers cash to another party, it must be recognized as an asset by the receiving party and derecognized by the paying party. This requirement applies regardless of whether the cash transferred is considered the proceeds from a borrowing or the collateral posted on a borrowing.

The table below summarizes the accounting for cash transferred in a secured borrowing. See Examples 5-1, 5-2, and 5-11 for illustrations.

Table 5-2

Scope	All secured borrowings within the scope of ASC 860-30 and all cash posted as collateral on a derivative transaction (see Section 5.3.2.3) or securities lending transaction.
Accounting by the payor of cash — The payor is the transferee of financial assets in a secured borrowing (i.e., the creditor or secured party) or the party with a derivative liability.	The payor of cash should account for the payment as follows: Derecognize the cash transferred. Recognize a receivable for the return of the cash paid. ASC 815-10-45-1 through 45-7 apply to the balance sheet presentation of fair value amounts recognized for a receivable that represents the right to reclaim cash posted as collateral for outstanding derivative liabilities.(a)
Accounting by the recipient of cash — The recipient is the transferor in a secured borrowing (i.e., the debtor or pledging party) or the party with a derivative asset.	The recipient of cash should account for the receipt as follows: Recognize the cash as an asset.(b),(c) Recognize an obligation to return the cash received. ASC 815-10-45-1 through 45-7 apply to the balance sheet presentation of fair value amounts recognized for a liability that represents the obligation to return cash received as collateral for outstanding derivative assets. The recipient should also consider whether cash received should be presented and disclosed as restricted cash.
Notes to Table: (a) The payment (receipt) of cash on centrally cleared derivative transactions may legally represent a settlement (or partial settlement) of a derivative. In these situations, there is no receivable (liability) to account for under ASC 860-30; rather, the cash paid (received) is considered a settlement (or partial settlement) of an outstanding derivative liability (asset). (b) Cash held by a third party in custody represents cash that should be recognized by the recipient. (c) If the cash is used to purchase securities, the cash received is derecognized and those securities are accounted for in accordance with other applicable U.S. GAAP (e.g., ASC 320 for debt securities).

See Section 5.4.3 for an example illustrating the accounting for cash payments in a securities lending transaction.

5.3.2.2 Transferor’s Accounting for Liabilities Recognized in a Secured Borrowing

5.3.2.2.1 General

A liability recognized by a debtor in a secured borrowing represents a unit of account that is separate from the assets pledged as collateral for that obligation. ASC 860-30 also does not specifically address the classification or terminology used to describe liabilities recognized in a secured borrowing.

5.3.2.2.2 Initial Measurement

The general principle in ASC 860 is to initially recognize liabilities incurred in transfers at fair value. However, if the FVO is not elected, any fees or costs incurred with third parties that are direct and incremental costs (i.e., debt issue costs) may be capitalized into the initial measurement of the liability.11 Thus, when a liability is incurred in exchange for cash and the FVO is not elected, the initial measurement of the liability equals the sum of:

The amount of cash received.12
The debt issue costs incurred.

5.3.2.2.3 Subsequent Measurement

The liability should be subsequently measured in accordance with applicable U.S. GAAP, which may include:

ASC 470-10 — Addresses increasing-rate debt and indexed debt.
ASC 470-30 — Covers participating mortgage liabilities.
ASC 815-15 — Discusses embedded derivatives.
ASC 825-10 — Addresses application of the FVO.
ASC 835-30 — Covers the interest method.

For further discussion of such subsequent measurement, see Deloitte’s Roadmap Issuer's Accounting for Debt.

Connecting the Dots

Liabilities for secured borrowings are often recourse only to the transferred financial assets. As a result, questions often arise about whether there is an embedded credit derivative that must be separated from the host liability under ASC 815-15. The embedded credit feature in a liability for a secured borrowing may be described as an indexation to the credit risk of the transferred financial assets (as opposed to the liability being subject only to the debtor’s credit risk). ASC 815-15-25-47 addresses when credit risk exposures are not clearly and closely related to a liability host, stating that the requirement to separate an embedded credit derivative does not apply to “a nonrecourse debt arrangement (that is, a debt arrangement in which, in the event that the debtor does not make the payments due under the loan, the creditor has recourse solely to the specified property pledged as collateral).” This exception generally applies to the evaluation of the credit risk of a nonrecourse liability in a secured borrowing. However, it should not be applied in certain situations, including the accounting for credit-linked notes, liabilities that introduce a credit risk unrelated to the transferred financial assets, and liabilities in which payment depends on derivative instruments.

Derecognition of a liability in a secured borrowing is subject to the guidance in ASC 405-20-40-1, which states:

Unless addressed by other guidance (for example, paragraphs 405-20-40-3 through 40-4 or paragraphs 606-10-55-46 through 55-49), a debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if either of the following conditions is met:

The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes the following:
1. Delivery of cash
2. Delivery of other financial assets
3. Delivery of goods or services
4. Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds.
The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. For purposes of applying this Subtopic, a sale and related assumption effectively accomplish a legal release if nonrecourse debt (such as certain mortgage loans) is assumed by a third party in conjunction with the sale of an asset that serves as sole collateral for that debt.

Connecting the Dots

An entity may transfer a financial asset in a transaction that represents a nonrecourse borrowing (i.e., the transferee only has recourse to the financial asset pledged as collateral). While the transferor is only “at risk” to the extent of the fair value of the financial asset transferred (i.e., the pledged collateral), if it does not apply the FVO, the transferor cannot write down its liability for declines in the fair value of the financial asset. Rather, if the FVO is not applied, the amount recognized for the liability for the secured borrowing would not be reduced until one of the conditions in ASC 405-20-40-1 is met.

5.3.2.3 Transferor’s Accounting for Pledges of Cash Collateral in Derivative Transactions

A CSA is a contract attached to another transaction that defines certain credit terms between counterparties, such as credit thresholds, collateralization process, and credit termination events. CSAs are often executed in conjunction with derivative transactions. They require the transfer of cash or other noncash collateral from the party in a loss position to the party in a gain position when the fair value of a derivative (or portfolio of derivatives) exceeds a certain posting threshold. Although cash is often posted as collateral, liquid securities with high credit quality (e.g., U.S. Treasury securities) may be eligible to be posted as collateral. When securities are pledged as collateral, the party that receives the pledged securities may be able to sell or repledge those securities. In these situations, the securities to be returned to the party that has posted the collateral must be of the same issuer, series, class, maturity, mortgage pool, CUSIP number, coupon, and principal amount.

The posting of cash as collateral on a derivative contract is not a transfer under ASC 860-10. Nevertheless, ASC 860-30 applies when cash is posted as collateral on derivative transactions. Therefore, the party that posts cash must derecognize the cash and recognize a receivable for the right to reclaim the cash. The party that receives the cash recognizes it as an asset and recognizes a liability for the obligation to return the cash. The posting of noncash financial assets as collateral on a derivative contract is a transfer within the scope of ASC 860-10. See Section 5.3.3.2 for discussion of the accounting for noncash collateral posted on derivative transactions.

Connecting the Dots

The posting of cash margin or collateral on centrally cleared derivative transactions may legally represent a settlement (or partial settlement) of an outstanding derivative. In these situations, there is no recognized borrowing to account for under ASC 860-30; rather, the payor of cash is considered to have extinguished its derivative liability and the receiver of cash is considered to have been repaid its derivative asset.

5.3.2.4 Transferee’s Accounting for Assets Recognized in a Secured Borrowing

In a transfer of financial assets for cash accounted for as a secured borrowing, the transferee recognizes a receivable from the transferor. The receivable should be subsequently accounted for under other applicable U.S. GAAP (e.g., ASC 310-10 or the FVO in ASC 825-10). See Examples 5-4 and 5-5 for illustrations of the transferee’s subsequent accounting for a receivable from a transferor.

Connecting the Dots

Assets recognized for secured borrowings are often recourse only to the transferred financial assets. As a result, questions often arise about whether there is an embedded credit derivative that must be separated from the host receivable under ASC 815-15. The embedded credit feature in a receivable for a secured borrowing may be described as an indexation to the credit risk of the transferred financial assets (as opposed to the receivable being subject only to the debtor’s credit risk). ASC 815-15-25-47 addresses when credit risk exposures are not clearly and closely related to a receivable host, stating that the requirement to separate an embedded credit derivative does not apply to “a nonrecourse debt arrangement (that is, a debt arrangement in which, in the event that the debtor does not make the payments due under the loan, the creditor has recourse solely to the specified property pledged as collateral).” This exception generally applies to the evaluation of the credit risk of a nonrecourse receivable in a secured borrowing. However, it should not be appropriate in certain situations, including the accounting for credit-linked notes, receivables that contain a credit risk unrelated to the transferred financial assets, and receivables in which payment depends on derivative instruments.

5.3.3 Accounting for Noncash Financial Assets in a Secured Borrowing

5.3.3.1 General

The accounting for noncash collateral is more complex than the accounting for cash payments in a secured borrowing. As discussed in ASC 860-30-25-6 through 25-9, the accounting depends on whether noncash financial assets in a secured borrowing represent collateral or proceeds. That is, noncash financial assets that are pledged in a transfer that does not meet the conditions for sale accounting (including noncash financial assets pledged as collateral on outstanding derivatives) are accounted for differently from noncash financial assets that represent the proceeds in a reciprocal transaction between two parties that does not meet the conditions for sale accounting. Section 5.3.3.2 discusses noncash financial assets that represent collateral, and Section 5.3.3.3 addresses noncash financial assets that represent the proceeds in a secured borrowing.

5.3.3.2 Noncash Financial Assets That Represent Collateral

This section addresses the accounting for the following:

Noncash financial assets that represent the collateral in a secured borrowing.13
Noncash financial assets pledged as collateral on outstanding derivative instruments.

The table below summarizes the accounting in ASC 860-30-25-5 that applies to the transferor and transferee when noncash financial assets represent pledged collateral.

Table 5-3

Scope	All secured borrowings within the scope of ASC 860-30 and noncash collateral posted on a derivative transaction. Does not include noncash financial assets that are considered proceeds in a secured borrowing (see Section 5.3.3.3.1).
Accounting by the party that transfers noncash financial assets as collateral — The party that transfers noncash collateral is the transferor of financial assets in a secured borrowing (i.e., the debtor or pledging party) or the party with a derivative liability.	There is no accounting recognition by the transferor of noncash financial assets unless it defaults on the terms of the secured contract. The transferor should not derecognize noncash financial assets pledged as collateral unless it defaults under the terms of the secured contract and is no longer entitled to redeem the pledged assets (see ASC 860-30-25-5(c) and (d)).(a) The transferor continues to measure noncash financial assets pledged as collateral in the same manner as it would if those assets had not been pledged (see ASC 860-30-35-2). For example, if a debt security is pledged as collateral, the transferor continues to classify that security as trading, available for sale, or held to maturity according to its classification before being pledged. If the secured party has a right by custom or contract to sell or repledge noncash collateral, the transferor should reclassify those financial assets on its balance sheet to distinguish them from other assets not so encumbered (see ASC 860-30-25-5(a)).(b) ASC 860-30 does not specify the classification or terminology for the transferor to use in describing reclassified noncash financial assets that have been pledged as collateral. If the transferor defaults under the terms of the secured contract and is no longer entitled to redeem the pledged asset (i.e., the transferor does not cure the default within any prescribed period it has to cure such default), it should derecognize the pledged noncash financial asset and recognize either a receivable from the transferee or an extinguishment of the liability previously recognized for the secured borrowing (see ASC 860-30-25-5(c) and ASC 860-30-40-1). Derecognition of the liability previously recognized for the secured borrowing is appropriate only to the extent of the amount of derecognition that meets one of the conditions in ASC 405-20-40-1. In other words, after derecognizing the financial assets pledged as collateral, the transferor may still owe amounts to the transferee.
Accounting by the party that receives noncash financial assets pledged as collateral — The recipient is the transferee of financial assets in a secured borrowing (i.e., the creditor or secured party) or the party with a derivative asset.	The secured party is not required to perform any accounting recognition unless one of the following conditions is met: The secured party transfers the pledged collateral in a transfer that is accounted for as a sale. The transferor defaults under the terms of the secured contract and is no longer entitled to redeem the pledged assets. The secured party might sell the noncash financial assets received as collateral to raise cash as part of another secured borrowing transaction. If the secured party sells the collateral, it recognizes the proceeds from the sale and a corresponding obligation to return the collateral to the transferor.(c) Generally, no gain or loss is recognized on the sale. ASC 860-30 does not address the classification or terminology to be used to describe a liability incurred by a secured party that sells pledged collateral or how to subsequently measure this liability. We believe that this liability should be subsequently measured at fair value, with changes in fair value recognized in earnings.(d) If the transferor defaults on the secured contract and does not cure the default within the prescribed period for doing so (i.e., the transferor is no longer entitled to redeem the pledged asset), the secured party should (1) recognize the noncash collateral as an asset, initially measured at fair value in accordance with ASC 860-30-30-1, or (2) derecognize the liability to return the noncash collateral if it has been previously sold.
Notes to Table: (a) In the absence of a default under the terms of the secured contract, the transferor still controls the pledged noncash financial assets and therefore should not derecognize them. The transferor does not derecognize pledged noncash financial assets even if the secured party sells them to a third party. (b) This reclassification is required only if the secured party has the right by custom or contract to sell or repledge the collateral before a default by the transferor. If the secured party only has the right to sell or repledge the collateral upon a default by the transferor under the terms of the secured contract, this reclassification is not required. (c) In this context, “sale” means that the transaction meets the conditions for sale accounting in ASC 860-10-40-5. (d) The sale of a pledged asset represents a sale of a security that is not owned (i.e., a short sale). ASC 942-405-35-1 states that the “obligations incurred in short sales shall be subsequently measured at fair value through the income statement at each reporting date. Interest on the short positions shall be accrued periodically and reported as interest expense.”

5.3.3.3 Noncash Collateral That Represents Proceeds

5.3.3.3.1 General

Special consideration is necessary in securities lending transactions that are collateralized by noncash financial assets that may be sold or repledged by the recipient rather than by cash. In these transactions, there are two types of noncash financial assets: (1) the loaned securities and (2) the securities that are posted as collateral by the borrower of the loaned securities. The noncash financial assets received by the lender of securities as so-called collateral actually represent the proceeds in a secured borrowing when those noncash financial assets can be sold or repledged. That is, ASC 860-30-25-8 requires the lender of securities to account for any noncash financial assets received that may be sold or repledged in the same way that a transferor of financial assets accounts for cash received in a secured borrowing. What is unique is that the lender of securities is considered the borrower for accounting purposes and the borrower of securities is considered the lender for accounting purposes.

The table below describes the accounting in situations in which noncash financial assets are pledged as collateral in a securities lending transaction that is accounted for as a secured borrowing. 14

Table 5-4

	Loaned Securities(a)	Collateral Pledged(a),(b)
Borrower — The borrower in a securities lending transaction is the transferee of the loaned securities. The borrower pledges collateral to the lender of the loaned securities.	The borrower does not recognize the securities borrowed as an asset. However, if the borrower sells the borrowed securities, it recognizes an obligation to return them to the lender (see ASC 860-30-25-5(b) and ASC 860-30-25-10). That liability should be initially and subsequently measured at fair value, with changes in fair value recognized in earnings.(c)	Posting securities as collateral is a transfer under ASC 860-10. The borrower does not derecognize the securities posted as collateral because it has not surrendered control over them. However, the borrower should reclassify the securities on its balance sheet to distinguish them from other assets not so encumbered or should disclose that the securities have been pledged (see ASC 860-30-25-5(a) and ASC 860-30-50-1A(b)).(d) If the borrower defaults on the terms of the secured contract and any period available to cure the default lapses, the borrower should derecognize the securities pledged as collateral (see ASC 860-30-25-5(c)).
Lender — The lender in a securities lending transaction is the transferor of the loaned securities. The lender receives the collateral pledged by the borrower of the loaned securities.	Because the lender maintains control over the loaned securities, it does not derecognize them even if they have been sold by the borrower. However, if the borrower defaults on the terms of the secured contract and any period available to cure that default lapses, the lender derecognizes the loaned securities. The lender discloses that the securities have been pledged (see ASC 860-30-50-1A(b)).	If the lender can sell or repledge the collateral, it should recognize (1) an asset for the pledged securities initially measured at fair value and (2) an obligation to return the pledged securities.(e) If the lender cannot sell or repledge the collateral, it does not recognize the pledged securities.(f)
Notes to Table: (a) The loaned securities are not considered collateral. Collateral represents the securities pledged by the securities borrower to the securities lender to secure the securities lending transaction. (b) The collateral pledged to the securities lender often represents liquid, high-credit-quality securities, such as U.S. Treasury securities, and the securities borrower often has the right to substitute the collateral. As noted in the table, the securities lender treats the so-called collateral as proceeds in a secured borrowing if it can sell or repledge those securities. In this table, it is assumed that the lender of securities must return the same or substantially the same securities upon settlement of the secured contract. (c) The sale of a pledged asset represents a sale of a security that is not owned (i.e., a short sale). ASC 942-405-35-1 states: The obligations incurred in short sales shall be subsequently measured at fair value through the income statement at each reporting date. Interest on the short positions shall be accrued periodically and reported as interest expense. (d) The securities borrower does not derecognize the pledged securities even if they are sold by the securities lender because the securities borrower maintains effective control over the securities. In addition, the securities borrower must apply the same measurement method to the pledged securities as it did before the transfer (see ASC 860-30-35-2). As noted below, the securities lender recognizes the pledged securities because they represent the proceeds in a secured borrowing. This is one of the unique situations in which the transferor’s accounting under ASC 860 is not symmetrical to that of the transferee (i.e., the same securities are recognized on the balance sheet of two entities). Such accounting conforms with ASC 860-30-25-8. If, however, the lender was not required to return the same or substantially the same securities, the borrower would derecognize the pledged securities and recognize a receivable from the lender. (e) If the securities lender can sell or repledge noncash financial assets received as collateral, such pledged securities that are received as so-called collateral are accounted for as the proceeds of a secured borrowing. In these circumstances, the lender accounts for the pledged securities in the same manner as if cash had been received as collateral (see ASC 860-30-25-8). Therefore, the lender recognizes an asset for the pledged securities and an obligation to return the pledged securities. The lender should initially measure the securities at fair value (see ASC 860-30-30-1) and should subsequently account for them in accordance with other applicable U.S. GAAP (e.g., ASC 320 for debt securities). The lender should initially measure the liability for the obligation to return the pledged securities at fair value. The lender should subsequently measure the liability for the obligation to return the pledged securities at fair value, with changes in fair value reported in earnings (see note (c) to this table). Thus, if the lender accounts for pledged securities as available-for-sale debt securities, there will be an earnings “mismatch” during the term of the securities lending transaction because any changes in unrealized gains or losses on the pledged securities will be recognized in OCI while any changes in unrealized gains or losses on the obligation to return the pledged securities will be recognized in earnings immediately. If the securities lender transfers the pledged securities to a third party, it should apply ASC 860-10 to determine whether that transfer is a sale or secured borrowing. However, the obligation to return the pledged securities would not be derecognized until the lender returns the pledged securities or the borrower defaults on the terms of the secured contract and any period available to cure that default lapses. (f) ASC 860-30 does not address the securities lender’s accounting in situations in which pledged securities cannot be sold or repledged. (In practice, it would be unusual for the lender to be unable to sell or repledge securities received as collateral.) However, because the lender cannot sell or repledge the securities, they would be considered collateral rather than proceeds. As a result, the securities lender would not recognize the pledged securities unless the securities borrower defaults on the terms of the secured contract and any period available to cure that default lapses.

See Example 5-8 for an illustration of a securities lending transaction involving noncash collateral.

5.3.3.3.2 Special Considerations

5.3.3.3.2.1 Use of a Customer’s Securities in a Securities Lending Transaction

Securities owned by customers are not recognized on the balance sheets of broker-dealers that maintain custody of those securities. However, broker-dealers may be able to lend customer securities when they collateralize a margin loan. If a broker-dealer lends a customer’s security, it does not derecognize the margin loan receivable from the customer. If the broker-dealer’s lending of a customer’s security represents a sale under ASC 860-10, the broker-dealer should recognize an obligation to return the securities to the customer. If, however, the lending of a customer’s security does not represent a sale under ASC 860-10, the broker-dealer should not recognize the customer’s security or a liability to return it. See Example 5-9 for an illustration. A broker-dealer may also use customer securities as collateral to borrow securities in a securities lending transaction. As discussed in Table 5-4, when an entity pledges a security as collateral, it does not derecognize the pledged security from its balance sheet. Similarly, when the security pledged as collateral is not recognized on the broker-dealer’s balance sheet, as is the case with customer securities, the broker-dealer does not recognize an asset or an obligation to return the customer’s security when the security is transferred in a transaction that does not represent a sale under ASC 860-10. See Example 5-10 for an illustration.

Note that the same accounting would apply if an entity pledges a borrowed security as collateral on a derivative transaction. That is, the broker-dealer (or another entity) would not recognize a liability for the return of the pledged security or a corresponding asset from the derivative counterparty.

5.3.3.3.2.2 Securities Lending Without Collateral

In some countries, collateral is not pledged by the borrower in a securities lending transaction, although this practice is not common in the United States. We understand from informal discussions with the FASB staff that there is no accounting recognition by the lender or borrower unless the borrower sells the security or defaults on the term of the secured contract. If the borrower sells the security or defaults on the terms of the lending arrangement (i.e., does not return the security), it must recognize a liability for the obligation to return the borrowed security. If the borrower defaults by not returning the security, the securities lender must consider the need to derecognize the loaned security.

5.3.3.3.2.3 Simultaneous Borrowing and Lending of Different Securities

In some securities lending transactions, each party is simultaneously lending one security and borrowing another security (also referred to as “lending swaps”). For example, assume that Dealer A needs to borrow Security A to cover a short sale and Dealer B needs to borrow Security B to cover a short sale. Dealer A owns Security B and Dealer B owns Security A. Dealer A and Dealer B enter into a securities lending transaction (accounted for as a secured borrowing) in which Dealer A loans Security B to Dealer B and Dealer B loans Security A to Dealer A. The securities loaned by each party serve as the collateral on the securities borrowed by each party. Each party can sell or repledge the borrowed security. In these transactions, it is difficult to identify which party is the transferor and which party is the transferee. In fact, each party could be viewed as both a transferor and a transferee. Neither party would derecognize the security pledged as collateral (i.e., the securities loaned by each party) unless the other party defaulted on the terms of the secured contract and any period available to cure that default lapses (see ASC 860-30-25-5). ASC 860-30 does not specifically address, however, whether each party should consider the borrowed security as representing the proceeds for the security loaned. If the security is considered proceeds, each party would recognize an asset for the security and a liability for the obligation to return it to the other party. Although this is an acceptable interpretation of ASC 860-30, we do not believe that it constitutes a requirement. Rather, it would also be acceptable for each party to consider the security borrowed to be collateral. According to this view, neither party would recognize the borrowed security at inception of the transaction (i.e., there would be no accounting recognition for either party at inception). Each party should, however, apply the guidance in ASC 860-30 if it sells the borrowed security or the other party defaults on the terms of the secured contract.

Footnotes

When derivative or securities lending transactions are secured through the posting of cash, entities often view the cash payments as collateral. In repurchase agreements, entities often view the cash payment as the proceeds from a borrowing.

If the FVO is elected, these costs are expensed as incurred.

Unless one of the conditions in ASC 820-10-30-3A is met, the transaction price is considered fair value at recognition of the liability.

When a transfer of financial assets does not achieve sale accounting, the cash received by the transferor represents the proceeds of the secured borrowing and the transferred financial assets represent the noncash collateral pledged by the transferor to the transferee. In this section, the agreement associated with the transfer of financial assets with a pledge of collateral is referred to as the “secured contract.”

Although this table would apply to any transaction in which one party transfers a noncash financial asset and receives another noncash financial asset in return, in practice, these transactions are referred to as securities lending transactions.

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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.