On the Radar
Transfers and Servicing of Financial Assets
Determining whether a transfer of financial assets or servicing
rights qualifies as a sale for financial reporting purposes can be time-consuming
and complex. An entity must consider both the form and substance of the transfer. As
part of such an analysis, the entity would evaluate relevant legal and accounting
rules and interpretations and may need to consult legal experts. The outcome of this
analysis could significantly affect the classification, measurement, and earnings
impact of the transaction as well as the related financial statement ratios. This
guidance has not significantly changed for more than a decade, and no changes are
expected in the near term. However, in response to stakeholder feedback, the FASB
included transfers and servicing of financial assets in its recently released
invitation to comment on its agenda
consultation.
Accounting for Transfers of Financial Assets
The decision tree below illustrates the steps an entity would perform in
evaluating whether a transfer of financial assets (e.g., trade receivables, loan
receivables, or equity securities) qualifies as a sale for financial reporting
purposes.1
For a transfer of financial assets to be accounted for as a sale, the three
conditions in ASC 860-10-40-5 must be met. However, before evaluating those
conditions, a transferor must reach the following two conclusions to avoid
accounting for the transfer as a secured borrowing:
-
The transferor does not consolidate the transferee — ASC 810 addresses consolidation. Sale accounting can never be achieved for a transfer of financial assets to a consolidated affiliate.
-
The transfer involves an entire financial asset or a participating interest — If a transfer involves an interest in a financial asset, as opposed to the asset itself, sale accounting can only potentially be achieved if the interest meets the definition of a participating interest or the transferee transfers all interests in the recognized financial asset (e.g., transfers of 100 percent participations). ASC 860 addresses the conditions that an interest must meet to be a participating interest. The application of such guidance can be time-consuming and complex.
An entity that reaches the above two conclusions must evaluate
the three conditions for sale accounting in ASC 860. In evaluating these three
conditions, an entity would consider both the legal nature and the substance of
the transfer. To meet the conditions for sale accounting, the transfer must be a
true legal sale. This determination is made by attorneys, not accountants. Even
if the transfer meets this legal isolation condition, the transferee must be
able to freely pledge or exchange (i.e., sell) the financial asset received (or
the beneficial interests received from a securitization entity) and the
transferor cannot maintain effective control over the transferred financial
asset (e.g., by being able to repurchase it). An entity may need to use
significant judgment in evaluating these two conditions.
ASC 860 also addresses the initial and subsequent recognition,
measurement, and presentation for a transfer, as well as the related disclosures
an entity must provide. The guidance an entity applies will differ depending on
whether the transfer is accounted for as a sale or a borrowing.
Accounting Symmetry
The accounting for a transfer as a sale
or secured borrowing is generally symmetrical.2 That is, if the transferor meets the conditions to
account for a transfer of financial assets as a sale and
therefore derecognizes the transferred financial assets,
the transferee accounts for the transfer as a purchase
of financial assets. Similarly, if the transferor does
not meet the conditions to account for a transfer of
financial assets as a sale and reflects the transfer as
a secured borrowing (i.e., it does not derecognize the
financial assets), the transferee accounts for the
transfer as a receivable from the transferor.
Accounting for Servicing Assets and Servicing Liabilities
ASC 860-50 separately addresses the accounting for servicing of
financial assets, including transfers of servicing assets and disclosures. The
derecognition model for transfers of servicing assets differs from that for
transfers of financial assets. However, as with transfers of financial assets,
the accounting for a transfer of servicing rights is symmetrical between the
transferor and transferee.
Deloitte’s Roadmap Transfers
and Servicing of Financial Assets
comprehensively discusses the accounting for transfers
and servicing of financial assets, including
disclosures, in accordance with ASC 860. Entities may
also need to refer to Deloitte’s Roadmap Consolidation — Identifying a Controlling
Financial Interest to determine
whether a transferee must be consolidated by a
transferor.
Contacts
|
Andrew Pidgeon
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 415 783
6426
|
For information about Deloitte’s
offerings related to transfers and servicing of financial assets, please
contact:
|
Will Braeutigam
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 713 982
3436
|
Footnotes
1
Transfers of derivative assets, including nonfinancial
derivative assets subject to ASC 815, are accounted for under ASC 860
and are thus subject to the steps outlined in the decision tree below.
See ASC 815-10-40-2 and 40-3 for further details.
2
See Section 5.3.3.3.
In a securities lending arrangement in which
securities are loaned for noncash collateral
(e.g., a securities-for-securities transaction)
and the securities lender has the right to
transfer the collateral received (i.e., the
securities lender can sell or repledge the
collateral obtained), both the lender and the
borrower will recognize the collateral.