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 generally must 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.
Accounting for Transfers of Financial Assets
The flowchart 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.
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:
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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.
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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. 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 and often must consult
its accounting advisers.
ASC 860 also addresses the initial and subsequent recognition and measurement 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 symmetrical. 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
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Jonathan
Howard
Partner
Deloitte &
Touche LLP
+1 203 761
3235
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Steve Barta
Partner
Deloitte &
Touche LLP
+1 415 783
6392
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