7.1 General

Transfers of financial assets — control versus risks and rewards of ownership (see Section 7.2.1)

A control-based model is used. Under this model, each party to a transfer of financial assets recognizes or continues to recognize the assets that it controls and derecognizes assets when control is surrendered.

A multistep derecognition model is used. Under this model, an entity first considers risks and rewards, then considers control. In certain arrangements, derecognition may apply even when the asset is not transferred but the entity has an offsetting obligation to pass through the cash flows of a particular asset.

Transfers of financial assets — definition of control (see Section 7.2.2)

Control of a financial asset is surrendered only if (1) the transferred asset is legally isolated from the transferor and its consolidated affiliates; (2) the transferee has the ability to freely pledge or exchange the transferred financial asset (or third-party beneficial interest holders have the right to pledge or exchange the beneficial interests if the transferee’s sole purpose is to engage in securitization or asset-backed financing activities); and (3) the transferor, its consolidated affiliates, or agents do not maintain effective control over the transferred asset through other rights.

Control of a financial asset is surrendered if the transferee has the unilateral ability to sell that transferred asset. However, control is not the sole determining factor in the assessment of derecognition.

Transfers of financial assets — transfers of a portion of a financial asset (see Section 7.2.3)

Derecognition of a portion of a financial asset is allowed if the portion of the financial asset meets the definition of a participating interest in ASC 860-10-40-6A and all the conditions in ASC 860-10-40-4 through 40-5A are met for that participating interest.

For a specified portion of a financial asset to be assessed for derecognition, certain conditions must be met. If these conditions are not met, the entire asset must be assessed for derecognition.

Transfers of financial assets — retaining the rights to the cash flows of a financial asset (“pass-through arrangements”) (see Section 7.2.4)

Derecognition of a financial asset is not allowed if the contractual rights to the cash flows of that asset are retained.

An entity can derecognize a financial asset regardless of whether it retains the right to the contractual cash flows of that asset, provided that three restrictive conditions for pass-through arrangements are met.

Transfers of financial assets — impact of a cleanup call (see Section 7.2.5)

A call option held by a transferor that is also the servicer and that meets the definition of a cleanup call does not cause the transferor to maintain effective control over the transferred financial assets.

Regardless of whether a call option is considered a cleanup call, an entity must consider the effect of that call option when determining whether substantially all the risks and rewards of ownership of a financial asset are transferred or retained and whether control over the financial asset is surrendered.

Transfers of financial assets — repurchase agreements (see Section 7.2.6)

An entity must consider the restrictive conditions in ASC 860-10-40-24 and 40-24A, in addition to the criteria in ASC 860-10-40-4 through 40-5A, when determining whether continued recognition of a transferred financial asset subject to a repurchase agreement is appropriate.

Conditions for derecognition that are specific to repurchase agreements are not provided. Rather, derecognition of a repurchase agreement must be determined on the basis of (1) whether substantially all the risks and rewards of ownership of the financial assets are transferred or retained and, (2) in cases in which substantially all the risks and rewards of ownership have been neither transferred nor retained, whether control over the financial assets is surrendered.

Transfers of financial assets — recognition and measurement of a secured borrowing (see Section 7.2.7)

A secured borrowing equal to the consideration received must be recognized if a transfer of financial assets fails to qualify for derecognition. Guidance on the subsequent measurement of a secured borrowing is not provided.

Recognition and measurement of a secured borrowing depend on why the secured borrowing is being recognized. If a secured borrowing is recognized because an entity retains substantially all the risks and rewards of ownership of a financial asset, a secured borrowing equal to the consideration received is initially recognized. If a secured borrowing is recognized because an entity has neither retained nor transferred substantially all risks and rewards but has retained control over the financial asset, the secured borrowing is initially recognized only to the extent of the entity’s continuing involvement in the transferred asset.

Accounting for servicing rights — initial measurement of a servicing asset (see Section 7.3.1)

A servicing asset must be initially recognized at fair value.

A servicing asset retained as part of a transfer of financial assets is considered a retained interest in those transferred assets. Therefore, the servicing asset is initially recognized at its allocated previous carrying amount on the basis of its relative fair value as of the transfer date.

Accounting for servicing rights — subsequent measurement of a servicing asset or liability (see Section 7.3.2)

An entity has the option of subsequently measuring a servicing asset or liability at either fair value or amortized cost.

Guidance is not provided on the subsequent measurement of a servicing right because it is not considered a financial instrument. In practice, entities often account for servicing assets in accordance with IAS 38 and servicing liabilities in accordance with IAS 37.