ASC 860-10
Overall
860 Transfers and Servicing
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ASC 860-10 is the Overall subtopic for Transfers and Servicing; it sets the scope for the whole topic and, critically, states the derecognition test for transferred financial assets. Under 860-10-40-5, a transfer of an entire financial asset, group of entire financial assets, or a participating interest is a sale if and only if (a) the assets are legally isolated from the transferor even in bankruptcy, (b) each transferee (or beneficial interest holder) can pledge or exchange what it received without a constraint that gives the transferor more than a trivial benefit, and (c) the transferor does not maintain effective control. If any condition fails, the transfer is accounted for as a secured borrowing under 860-30.
Key points (7)
- Sale accounting requires surrender of control, which exists only if all three conditions in 860-10-40-5 are met—legal isolation, the transferee's unconstrained right to pledge or exchange, and no maintained effective control—and the analysis must first ask whether the transferor would consolidate the transferee (860-10-40-4).
- An entire financial asset generally cannot be split before transfer unless every component is a participating interest, and a transfer may not be accounted for partly as a sale and partly as a secured borrowing (860-10-40-4D); non-participating portions are accounted for under 860-30-25-2 (860-10-40-4E).
- A participating interest requires pro rata ownership from the transfer date, proportionate sharing of all cash flows (excluding fair servicing compensation), equal priority with no subordination or recourse beyond standard reps and warranties, and no unilateral right to pledge or exchange the entire asset (860-10-40-6A).
- Effective control is maintained by, among other things, an agreement that both entitles and obligates the transferor to repurchase the same or substantially the same assets before maturity at a fixed or determinable price (860-10-40-24), a unilateral ability to reclaim specific assets that gives more than a trivial benefit (other than a cleanup call), or a put so favorable that exercise is probable (860-10-40-5(c)).
- A repurchase-to-maturity transaction must be accounted for as a secured borrowing as if the transferor maintained effective control (860-10-40-5A; 860-10-40-24A), and a transfer with a related repurchase financing is accounted for separately from the initial transfer (860-10-40-4C).
- Isolation must hold regardless of how remote bankruptcy is (860-10-40-11) and is typically supported by a true sale opinion and, for affiliated transfers, a nonconsolidation opinion (860-10-55-18A), though a legal opinion may be unnecessary for routine transfers with no continuing involvement (860-10-55-18B).
- The topic applies to all entities (860-10-15-2) but excludes transfers of nonfinancial assets, unrecognized financial assets, custody transfers for safekeeping, contributions, in substance nonfinancial assets, owner investments/distributions, and certain lease transactions (860-10-15-4).
For students. This is the gatekeeper test for whether a securitization, factoring, repo, or loan participation is a sale (off-balance-sheet) or a financing; missing any one of the three conditions in 860-10-40-5 forces secured-borrowing treatment. The most common mistake is assuming a partial transfer qualifies for sale accounting—unless the piece transferred meets every element of the participating interest definition (pro rata, proportionate cash flows, equal priority, no recourse), the whole thing is a borrowing.
surrender of controlparticipating interestlegal isolationeffective controlsecured borrowingsecuritizationrepurchase agreementcontinuing involvement
Machine-generated study aid for ASC 860-10. Check the source paragraphs below.
860-10-00Status
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860-10-00-1
The following table identifies the changes made to this Subtopic.
860-10-05Overview and Background
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860-10-05-1
The Transfers and Servicing Topic establishes accounting and reporting standards for transfers and servicing of financial assets. It also establishes the accounting for transfers of servicing rights.
860-10-05-2
The Transfers and Servicing Topic includes the following four Subtopics:
- aOverall
- bSales of Financial Assets
- cSecured Borrowings and Collateral
- d
- eServicing Assets and Liabilities.
Transfers of Financial Assets
860-10-05-3
This Subtopic, together with the other Subtopics within this Topic, provides accounting and reporting standards for transfers and servicing of financial assets. It also addresses transfers of servicing rights.
860-10-05-4
Accounting for transfers in which the transferor has no continuing involvement with the transferred financial assets or with the transferee has not been controversial. However, transfers of financial assets often occur in which the transferor has some continuing involvement either with the assets transferred or with the transferee. Examples of continuing involvement with the transferred financial assets include, but are not limited to, any of the following:
- a Servicing arrangements
- aa Recourse arrangements
- aaa Guarantee arrangements
- b
- c Agreements to purchase or redeem transferred financial assets
- d Options written or held
- dd Derivative financial instruments that are entered into contemporaneously with, or in contemplation of, the transfer
- ddd Arrangements to provide financial support
- e Pledges of collateral
- f The transferor's beneficial interests in the transferred financial assets.
860-10-05-5
Sales and other transfers may result in a disaggregation of financial assets and liabilities into components, which become separate assets and liabilities. This Subtopic provides guidance on accounting for such transfers and provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.
Types of Transfers
860-10-05-6
Transfers of financial assets take many forms. This guidance provides an overview of the following types of transfers discussed in this Topic:
- a
- b Factoring
- c Transfers of receivables with recourse
- d Securities lending transactions
- e
- f
- g Banker's acceptances.
860-10-05-7
An originator of a typical securitization (the transferor) transfers a portfolio of financial assets to a securitization entity, commonly a trust. Financial assets such as mortgage loans, automobile loans, trade receivables, credit card receivables, and other revolving charge accounts are financial assets commonly transferred in securitizations. Securitizations of mortgage loans may include pools of single-family residential mortgages or other types of real estate mortgage loans, for example, multifamily residential mortgages and commercial property mortgages. Securitizations of loans secured by chattel mortgages on automotive vehicles as well as other equipment (including direct financing or sales-type leases) also are common.
860-10-05-8
Beneficial interests in the securitization entity are sold to investors and the proceeds are used to pay the transferor for the transferred financial assets. Those beneficial interests may comprise either a single class having equity characteristics or multiple classes of interests, some having debt characteristics and others having equity characteristics. The cash collected from the portfolio is distributed to the investors and others as specified by the legal documents that established the entity.
860-10-05-11
Securitizations of credit card and other receivable portfolios usually involve a specified reinvestment period (usually 18 to 36 months), during which the trust will purchase additional credit card receivables generated by the selected accounts. After the reinvestment period, a period of liquidation occurs during which the investors receive an allocated portion of principal payments relating to receivables in the trust. The liquidation method may vary depending on the terms of the agreement and may be a participation method (payout allocation rate may be fixed, preset, or variable) or a controlled amortization method (payout based on a predetermined schedule). Specific methods are as follows:
- a
- b
- c
860-10-05-12
Credit card securitizations (and other types of securitizations) may include a removal-of-accounts provision that permits the seller, under certain conditions and with trustee approval, to withdraw receivables from the pool of securitized receivables.
860-10-05-13
Many securitization structures provide for a disproportionate distribution of cash flows to various classes of investors during the amortization period, which is referred to as a turbo provision. For example, a turbo provision might require the first $100 million of cash received during the amortization period of the securitization structure to be paid to one class of investors before any cash is available for repayment to other investors. Similarly, certain revolving-period securitizations use what is referred to as a bullet provision as a method of distributing cash to their investors. Under a bullet provision, during a specified period preceding liquidating distributions to investors, cash proceeds from the underlying assets are reinvested in short-term investments other than the underlying revolving-period receivables. Those investments mature or are otherwise liquidated to make a single bullet payment to certain classes of investors.
860-10-05-14
Factoring arrangements are a means of discounting accounts receivable on a nonrecourse, notification basis. Accounts receivable in their entireties are sold outright, usually to a transferee (the factor) that assumes the full risk of collection, without recourse to the transferor in the event of a loss. Debtors are directed to send payments to the transferee.
860-10-05-15
In a transfer of an entire receivable, a group of entire receivables, or a portion of an entire receivable with recourse, the transferor provides the transferee with full or limited recourse. The transferor is obligated under the terms of the recourse provision to make payments to the transferee or to repurchase receivables sold under certain circumstances, typically for defaults up to a specified percentage.
860-10-05-16
Securities lending transactions are initiated by broker-dealers and other financial institutions that need specific securities to cover a short sale or a customer's failure to deliver securities sold. Securities custodians or other agents commonly carry out securities lending activities on behalf of clients.
860-10-05-17
Transferees (borrowers) of securities generally are required to provide collateral to the transferor (lender) of securities, commonly cash but sometimes other securities or standby letters of credit, with a value slightly higher than that of the securities borrowed. If the collateral is cash, the transferor typically earns a return by investing that cash at rates higher than the rate paid or rebated to the transferee. If the collateral is other than cash, the transferor typically receives a fee.
860-10-05-18
Because of the protection of collateral (typically valued daily and adjusted frequently for changes in the market price of the securities transferred) and the short terms of the transactions, most securities lending transactions in themselves do not impose significant credit risks on either party. Other risks arise from what the parties to the transaction do with the assets they receive. For example, investments made with cash collateral impose market and credit risks on the transferor.
860-10-05-19
Government securities dealers, banks, other financial institutions, and corporate investors commonly use repurchase agreements to obtain or use short-term funds.
860-10-05-20
Repurchase agreements can be effected in a variety of ways. Some repurchase agreements are similar to securities lending transactions in that the transferee has the right to sell or repledge the securities to a third party during the term of the repurchase agreement. In other repurchase agreements, the transferee does not have the right to sell or repledge the securities during the term of the repurchase agreement. For example, in a tri-party repurchase agreement, the transferor transfers securities to an independent third-party custodian that holds the securities during the term of the repurchase agreement.
860-10-05-21
Many repurchase agreements are for short terms, often overnight, or have indefinite terms that allow either party to terminate the arrangement on short notice. Other repurchase agreements are for longer terms, sometimes until the maturity of the transferred financial asset (repo to maturity).
860-10-05-22
In certain industries, a typical customer's borrowing needs often exceed its bank's legal lending limits. To accommodate the customer, the bank may participate the loan to other banks (that is, transfer under a participation agreement a portion of the customer's loan to one or more participating banks).
860-10-05-23
Transfers by the originating lender may take the legal form of either assignments or participations. The transfers are usually on a nonrecourse basis, and the transferor (originating lender) continues to service the loan. The transferee (participating entity) may or may not have the right to sell or transfer its participation during the term of the loan, depending on the terms of the participation agreement.
860-10-05-24
Banker's acceptances provide a way for a bank to finance a customer's purchase of goods from a vendor for periods usually not exceeding six months. Under an agreement between the bank, the customer, and the vendor, the bank agrees to pay the customer's liability to the vendor upon presentation of specified documents that provide evidence of delivery and acceptance of the purchased goods. The principal document is a draft or bill of exchange drawn by the customer that the bank stamps to signify its acceptance of the liability to make payment on the draft on its due date.
860-10-05-25
Once the bank accepts a draft, the customer is liable to repay the bank at the time the draft matures. The bank recognizes a receivable from the customer and a liability for the acceptance it has issued to the vendor. The accepted draft becomes a negotiable financial instrument. The vendor typically sells the accepted draft at a discount either to the accepting bank or in the marketplace.
860-10-05-26
A risk participation is a contract between the accepting bank and a participating bank in which the participating bank agrees, in exchange for a fee, to reimburse the accepting bank in the event that the accepting bank's customer fails to honor its liability to the accepting bank in connection with the banker's acceptance. The participating bank becomes a guarantor of the credit of the accepting bank's customer.
860-10-10Objectives
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860-10-15Scope and Scope Exceptions
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Overall Guidance
860-10-15-1
The Scope Section of the Overall Subtopic establishes the pervasive scope for all Subtopics of the Transfers and Servicing Topic. Unless explicitly addressed within specific Subtopics, the following scope guidance applies to all Subtopics of the Transfers and Servicing Topic, with the exception of Subtopic 860-50, which has its own discrete scope.
Entities
860-10-15-2
The guidance in the Transfers and Servicing Topic applies to all entities.
Transactions
860-10-15-3
The guidance in the Transfers and Servicing Topic applies to the issues of accounting for transfers and servicing of financial assets.
860-10-15-4
The guidance in this Topic does not apply to the following transactions and activities:
- aExcept for transfers of servicing assets (see Section 860-50-40) and for the transfers noted in the following paragraph, transfers of nonfinancial assets
- bTransfers of unrecognized financial assets, for example, lease payments to be received under operating leases
- cTransfers of custody of financial assets for safekeeping
- dContributions (for guidance on accounting for contributions, see Subtopic 958-605)
- eTransfers of in substance nonfinancial assets, see Subtopic 610-20
- fInvestments by owners or distributions to owners of a business entity
- gEmployee benefits subject to the provisions of Topic 712
- hLeveraged leases subject to Topic 842
- iMoney-over-money and wrap lease transactions involving nonrecourse debt subject to Topic 842.
860-10-15-5
Paragraph 815-10-40-2 states that transfers of assets that are derivative instruments and subject to the requirements of Subtopic 815-10 but that are not financial assets shall be accounted for by analogy to this Topic.
860-10-15-6
Paragraph 860-10-55-2 provides further guidance on the application of the scope of this Topic to specific transactions.
860-10-30Initial Measurement
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860-10-35Subsequent Measurement
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860-10-40Derecognition
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860-10-40-1
This Section sets forth the conditions for derecognition of a transferred financial asset and is organized as follows:
- a
- bConditions for a sale of financial assets
- cApplication of the sale criteria to instruments that have the potential to be assets or liabilities
- dCircumstances that result in a transferor regaining control of assets previously sold
- e
Conditions for a Sale of Financial Assets
860-10-40-4
The objective of paragraph 860-10-40-5 and related implementation guidance is to determine whether a transferor and its consolidated affiliates included in the financial statements being presented have surrendered control over transferred financial assets or third-party beneficial interests. This determination:
- a Shall first consider whether the transferee would be consolidated by the transferor (for implementation guidance, see paragraph 860-10-55-17D)
- b Shall consider the transferor's continuing involvement in the transferred financial assets
- c Requires the use of judgment that shall consider all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer.
860-10-40-4C
Items (b) through (c) in paragraph 860-10-40-4 do not apply to a transfer of financial assets and a related repurchase financing. In transactions involving a contemporaneous transfer of a financial asset and a repurchase financing of that transferred financial asset with the same counterparty, a transferor and transferee shall separately account for the initial transfer of the financial asset and the related repurchase agreement. Paragraphs provide implementation guidance related to repurchase financings.
860-10-40-4D
To be eligible for sale accounting, an entire financial asset cannot be divided into components before a transfer unless all of the components meet the definition of a participating interest. The legal form of the asset and what the asset conveys to its holders shall be considered in determining what constitutes an entire financial asset (for implementation guidance, see paragraph 860-10-55-17E). An entity shall not account for a transfer of an entire financial asset or a participating interest in an entire financial asset partially as a sale and partially as a secured borrowing.
860-10-40-4E
If a transfer of a portion of an entire financial asset meets the definition of a participating interest, the transferor shall apply the guidance in the following paragraph. If a transfer of a portion of a financial asset does not meet the definition of a participating interest, the transferor and transferee shall account for the transfer in accordance with the guidance in paragraph 860-30-25-2. However, if the transferor transfers an entire financial asset in portions that do not individually meet the participating interest definition, the following paragraph shall be applied to the entire financial asset once all portions have been transferred.
860-10-40-5
A transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the transferor surrenders control over those financial assets shall be accounted for as a sale if and only if all of the following conditions are met:
- aIsolation of transferred financial assets. The transferred financial assets have been isolated from the transferor—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. Transferred financial assets are isolated in bankruptcy or other receivership only if the transferred financial assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor or any of its consolidated affiliates included in the financial statements being presented. For multiple step transfers, a bankruptcy-remote entity is not considered a consolidated affiliate for purposes of performing the isolation analysis. Notwithstanding the isolation analysis, each entity involved in the transfer is subject to the applicable guidance on whether it shall be consolidated (see paragraphs and the guidance beginning in paragraph 860-10-55-18). A set-off right is not an impediment to meeting the isolation condition.
- bTransferee's rights to pledge or exchange. This condition is met if both of the following conditions are met:
- 1Each transferee (or, if the transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing activities and that entity is constrained from pledging or exchanging the assets it receives, each third-party holder of its beneficial interests) has the right to pledge or exchange the assets (or beneficial interests) it received.
- 2No condition does both of the following:
- iConstrains the transferee (or third-party holder of its beneficial interests) from taking advantage of its right to pledge or exchange
- iiProvides more than a trivial benefit to the transferor (see paragraphs ).
If the transferor, its consolidated affiliates included in the financial statements being presented, and its agents have no continuing involvement with the transferred financial assets, the condition under paragraph 860-10-40-5(b) is met. - i
- 1
- cEffective control. The transferor, its consolidated affiliates included in the financial statements being presented, or its agents do not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred assets (see paragraph 860-10-40-22A). A transferor's effective control over the transferred financial assets includes, but is not limited to, any of the following:
- 1An agreement that both entitles and obligates the transferor to repurchase or redeem the transferred financial assets before their maturity (see paragraphs )
- 2An agreement, other than through a cleanup call (see paragraphs ), that provides the transferor with both of the following:
- iThe unilateral ability to cause the holder to return specific financial assets
- iiA more-than-trivial benefit attributable to that ability.
- i
- 3An agreement that permits the transferee to require the transferor to repurchase the transferred financial assets at a price that is so favorable to the transferee that it is probable that the transferee will require the transferor to repurchase them (see paragraph 860-10-55-42D).
- 1
860-10-40-5A
A repurchase-to-maturity transaction shall be accounted for as a secured borrowing as if the transferor maintains effective control (see paragraphs 860-10-40-24 through 40-24A).
860-10-40-6
For guidance on accounting for a transfer that satisfies the conditions in paragraph 860-10-40-5, see Subtopic 860-20, including Section 860-20-40's derecognition guidance and Section 860-20-25's guidance on recognition of new assets obtained and new liabilities. For guidance on accounting for a transfer that does not satisfy the conditions in paragraph 860-10-40-5, see Subtopic 860-30.
860-10-40-6A
A participating interest has all of the following characteristics:
- a From the date of the transfer, it represents a proportionate (pro rata) ownership interest in an entire financial asset. The percentage of ownership interests held by the transferor in the entire financial asset may vary over time, while the entire financial asset remains outstanding as long as the resulting portions held by the transferor (including any participating interest retained by the transferor, its consolidated affiliates included in the financial statements being presented, or its agents) and the transferee(s) meet the other characteristics of a participating interest. For example, if the transferor's interest in an entire financial asset changes because it subsequently sells another interest in the entire financial asset, the interest held initially and subsequently by the transferor must meet the definition of a participating interest.
- b From the date of the transfer, all cash flows received from the entire financial asset are divided proportionately among the participating interest holders (including any interest retained by the transferor, its consolidated affiliates included in the financial statements being presented, or its agents) in an amount equal to their share of ownership. An allocation of specified cash flows is not an allowed characteristic of a participating interest unless each cash flow is proportionately allocated to the participating interest holders. In determining proportionate cash flows:
- 1 Cash flows allocated as compensation for services performed, if any, shall not be included provided those cash flows meet both of the following conditions:
- i They are not subordinate to the proportionate cash flows of the participating interest.
- ii They are not significantly above an amount that would fairly compensate a substitute service provider, should one be required, which includes the profit that would be demanded in the marketplace.
- i
- 2 Any cash flows received by the transferor as proceeds of the transfer of the participating interest shall be excluded provided that the transfer does not result in the transferor receiving an ownership interest in the financial asset that permits it to receive disproportionate cash flows.
- 1
- c The priority of cash flows has all of the following characteristics:
- 1 The rights of each participating interest holder (including the transferor in its role as a participating interest holder) have the same priority.
- 2 No participating interest holder's interest is subordinated to the interest of another participating interest holder.
- 3 The priority does not change in the event of bankruptcy or other receivership of the transferor, the original debtor, or any other participating interest holder.
- 4 Participating interest holders have no recourse to the transferor (or its consolidated affiliates included in the financial statements being presented or its agents) or to each other, other than any of the following:
- i
- ii Ongoing contractual obligations to service the entire financial asset and administer the transfer contract
- iii Contractual obligations to share in any set-off benefits received by any participating interest holder.
That is, no participating interest holder is entitled to receive cash before any other participating interest holder under its contractual rights as a participating interest holder. For example, if a participating interest holder also is the servicer of the entire financial asset and receives cash in its role as servicer, that arrangement would not violate this requirement.
- 1
- d No party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset.
860-10-40-7
The guidance in the following paragraphs and the related implementation guidance beginning in paragraph 860-10-55-18 applies to transfers by all entities, including institutions for which the Federal Deposit Insurance Corporation (FDIC) would be the receiver.
860-10-40-8
Derecognition of transferred financial assets is appropriate only if the available evidence provides reasonable assurance that the transferred financial assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor or any of its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented and its creditors (see paragraph 860-10-55-23(c)).
860-10-40-9
The nature and extent of supporting evidence required for an assertion in financial statements that transferred financial assets have been isolated—put presumptively beyond the reach of the transferor, any of its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors, either by a single transaction or a series of transactions taken as a whole—depend on the facts and circumstances.
860-10-40-10
All available evidence that either supports or questions an assertion shall be considered, including whether the contract or circumstances permit the transferor to revoke the transfer. It also may include consideration of the legal consequences of the transfer in the jurisdiction in which bankruptcy or other receivership would take place, including all of the following:
- a Whether a transfer of financial assets would likely be deemed a true sale at law (see paragraph 860-10-55-18A) or otherwise isolated (see paragraph 860-10-55-18C)
- b Whether the transferor is affiliated with the transferee
- c Other factors pertinent under applicable law.
860-10-40-11
The requirement of paragraph 860-10-40-5(a) that transferred financial assets be isolated focuses on whether transferred financial assets would be isolated from the transferor in the event of bankruptcy or other receivership regardless of how remote or probable bankruptcy or other receivership is at the date of transfer. That is, the requirement would not be satisfied simply because the likelihood of bankruptcy of the transferor is determined to be remote.
860-10-40-12
A transferor's power to require the return of the transferred financial assets arising solely from a contract with the transferee, for example, a call option or removal-of-accounts provision, would not necessarily preclude a conclusion that transferred financial assets have been isolated from the transferor. However, such a power might preclude sale treatment if through it the transferor maintains effective control over the transferred financial assets. Some common financial transactions, for example, typical repurchase agreements and securities lending transactions, may isolate transferred financial assets from the transferor, although they may not meet the other conditions for surrender of control (see paragraph 860-10-40-5).
860-10-40-13
Whether securitizations isolate transferred financial assets may depend on such factors as whether the securitization is accomplished in one-step or multiple-step transfers. That is, the condition can be satisfied either by a single transaction or by a series of transactions considered as a whole. A securitization carried out in one transfer or a series of transfers may or may not isolate the transferred financial assets beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors. Whether it does depends on the structure of the securitization transaction taken as a whole, considering such factors as the type and extent of further involvement in arrangements to protect investors from credit, interest rate, and other risks, the availability of other financial assets, and the powers of bankruptcy courts or other receivers.
860-10-40-14
Paragraphs clarify the requirements for transfers by entities subject to the U.S. Bankruptcy Code to meet the condition in paragraph 860-10-40-5(a) that the transferred financial assets have been put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy. Paragraphs provide related guidance for entities not subject to the U.S. Bankruptcy Code. The discussion in paragraphs relates only to the isolation condition in paragraph 860-10-40-5(a). The conditions in paragraph 860-10-40-5(b) through (c) also shall be considered to determine whether a transferor has surrendered control over the transferred financial assets.
860-10-40-15
Many transferor-imposed or other conditions on a transferee's right to pledge or exchange both constrain a transferee from pledging or exchanging and, through that constraint, provide more than a trivial benefit to the transferor. Judgment is required to assess whether a particular condition results in a constraint. Judgment also is required to assess whether a constraint provides a more-than-trivial benefit to the transferor. If the transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing activities, that entity may be constrained from pledging or exchanging the transferred financial assets to protect the rights of beneficial interest holders in the financial assets of the entity. Paragraph 860-10-40-5(b) requires that the transferor look through the constrained entity to determine whether each third-party holder of its beneficial interests has the right to pledge or exchange the beneficial interests that it holds. The considerations in paragraphs apply to the transferee or the third-party holders of its beneficial interests in an entity that is constrained from pledging or exchanging the assets it receives and whose sole purpose is to engage in securitization or asset-backed financing activities.
860-10-40-16
A condition imposed by a transferor that constrains the transferee presumptively provides more than a trivial benefit to the transferor. A condition not imposed by the transferor that constrains the transferee may or may not provide more than a trivial benefit to the transferor. For example, if the transferor refrains from imposing its usual contractual constraint on a specific transfer because it knows an equivalent constraint is already imposed on the transferee by a third party, it presumptively benefits more than trivially from that constraint. However, the transferor cannot benefit from a constraint if it is unaware at the time of the transfer that the transferee is constrained.
860-10-40-16A
In some circumstances in which the transferor has no continuing involvement with the transferred financial assets, some conditions may constrain a transferee from pledging or exchanging the financial assets. Paragraph 860-10-40-5(b) states that if the transferor, its consolidated affiliates included in the financial statements being presented, and its agents have no continuing involvement with the transferred financial assets, the condition under paragraph 860-10-40-5(b) is met. For example, if a transferor receives only cash in return for the transferred financial assets and the transferor, its consolidated affiliates included in the financial statements being presented, and its agents have no continuing involvement with the transferred financial assets, sale accounting is allowed under paragraph 860-10-40-5(b) even if the transferee entity is significantly limited in its ability to pledge or exchange the transferred assets.
860-10-40-17
All of the following are examples of conditions that both constrain the transferee and presumptively provide the transferor with more than trivial benefits:
- aA provision that prohibits selling or pledging a transferred loan receivable. This condition not only constrains the transferee but also provides the transferor with the more-than-trivial benefit of knowing who holds the financial asset (a prerequisite to repurchasing the financial asset) and of being able to block the financial asset from being transferred to a competitor for the loan customer's business.
- bTransferor-imposed contractual constraints that narrowly limit timing or terms, for example, allowing a transferee to pledge only on the day assets are obtained or only on terms agreed to with the transferor.
- cSome rights or obligations to reacquire transferred financial assets or beneficial interests, including all of the following:
- 1A freestanding call option written by a transferee to the transferor. Such an option may benefit the transferor and, if the transferred financial assets are not readily obtainable in the marketplace, is likely to constrain a transferee because the transferee might have to default if the call option was exercised and the transferee had pledged or exchanged the financial assets.
- 1aA call option to repurchase third-party beneficial interests at the price paid plus a stated return if the third-party holders of its beneficial interests are constrained from pledging or exchanging their beneficial interests due to that call option.
- 2A call option written by a transferee to the transferor that is sufficiently deep-in-the-money, if the transferred financial assets are not readily obtainable in the marketplace, because the transferee would be more likely to have to hold the assets to comply with a potential exercise of the call option.
- 3A freestanding forward purchase-sale contract between the transferor and the transferee on transferred financial assets not readily obtainable in the marketplace would benefit the transferor and is likely to constrain a transferee.
- 4
- 1
860-10-40-18
All of the following are examples of conditions that presumptively would not constrain a transferee from pledging or exchanging the transferred financial asset:
- a A transferor's right of first refusal on the occurrence of a bona fide offer to the transferee from a third party, because the right in itself does not enable the transferor to compel the transferee to sell the financial asset and the transferee would be in a position to receive the sum offered by exchanging the financial asset, albeit possibly from the transferor rather than the third party
- b A requirement to obtain the transferor's permission to sell or pledge that is not to be unreasonably withheld
- c A prohibition on sale to the transferor's competitor if other potential willing buyers exist
- d A regulatory limitation such as on the number or nature of eligible transferees (as in the circumstance of securities issued under Securities Act Rule 144A or debt placed privately)
- e Illiquidity, for example, the absence of an active market
- f
- g Freestanding rights to reacquire transferred assets that are readily obtainable.
860-10-40-19
Judgment is required to assess the significance of some conditions. For example, a prohibition on sale to the transferor's competitor would be a constraint if that competitor were the only potential willing buyer other than the transferor.
860-10-40-21
As discussed in paragraphs , some rights or obligations to reacquire transferred financial assets, regardless of whether they constrain the transferee, may result in the transferor's maintaining effective control over the transferred financial assets, thus precluding sale accounting under paragraph 860-10-40-5(c). For example, an attached call option in itself would not constrain a transferee who is able, by exchanging or pledging the asset subject to that call, to obtain substantially all of its economic benefits. However, an attached call option could result in the transferor's maintaining effective control over the transferred asset(s) because the attached call option gives the transferor the unilateral ability to cause whoever holds that specific asset to return it.
860-10-40-22
This guidance discusses the condition in paragraph 860-10-40-5(c) that the transferor, its consolidated affiliates included in the financial statements being presented, or its agents do not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred financial assets.
860-10-40-22A
Paragraph 860-10-40-4 states that, to assess whether the transferor maintains effective control over the transferred financial assets, all continuing involvement by the transferor, its consolidated affiliates included in the financial statements being presented, or its agents shall be considered continuing involvement by the transferor. When assessing effective control, the transferor only considers the involvements of an agent when the agent acts for and on behalf of the transferor. If the transferor and transferee have the same agent, the agent's activities on behalf of the transferee shall not be considered in the transferor's evaluation of whether it has effective control over a transferred financial asset. For example, an investment manager may act as a fiduciary (agent) for both the transferor and the transferee; therefore, the transferor need only consider the involvements of the investment manager if it is acting on its behalf.
860-10-40-23
Although paragraph 860-10-40-5 sets forth criteria that must be met to achieve sale accounting, this guidance addresses criteria that must be met for a transfer to fail the condition in paragraph 860-10-40-5(c) through an agreement of the type described in paragraph 860-10-40-5(c)(1) and thus preclude sale accounting and result in accounting for the transfer as a secured borrowing.
860-10-40-24
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 following conditions are met:
- a The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred. To be substantially the same, the financial asset that was transferred and the financial asset that is to be repurchased or redeemed need to have all of the following characteristics:
- 1 The same primary obligor (except for debt guaranteed by a sovereign government, central bank, government-sponsored enterprise or agency thereof, in which circumstance the guarantor and the terms of the guarantee must be the same)
- 2 Identical form and type so as to provide the same risks and rights
- 3 The same maturity (or in the circumstance of mortgage-backed pass-through and pay-through securities, similar remaining weighted-average maturities that result in approximately the same market yield)
- 4 Identical contractual interest rates
- 5 Similar assets as collateral
- 6 The same aggregate unpaid principal amount or principal amounts within accepted good delivery standards for the type of security involved. Participants in the mortgage-backed securities market have established parameters for what is considered acceptable delivery. These specific standards are defined by the Securities Industry and Financial Markets Association and can be found in Uniform Practices for the Clearance and Settlement of Mortgage-Backed Securities and Other Related Securities, which is published by the Securities Industry and Financial Markets Association.
See paragraph 860-10-55-35 for implementation guidance related to these conditions. - 1
- b
- c The agreement is to repurchase or redeem the financial assets before maturity, at a fixed or determinable price.
- d The agreement is entered into contemporaneously with, or in contemplation of, the transfer.
860-10-40-24A
Notwithstanding the characteristic in paragraph 860-10-40-24 that refers to a repurchase of the same (or substantially-the-same) financial asset, a repurchase-to-maturity transaction shall be accounted for as a secured borrowing as if the transferor maintains effective control.
860-10-40-25
With respect to the condition in (a) in paragraph 860-10-40-24 to maintain effective control under the condition in paragraph 860-10-40-5(c) as illustrated in paragraph 860-10-40-5(c)(1), the transferor must have both the contractual right and the contractual obligation to repurchase or redeem financial assets that are identical to those transferred or substantially the same as those concurrently transferred. Transfers that include only the right to reacquire, at the option of the transferor or upon certain conditions, or only the obligation to reacquire, at the option of the transferee or upon certain conditions, may not maintain the transferor's control, because the option might not be exercised or the conditions might not occur. Similarly, expectations of reacquiring the same securities without any contractual commitments (for example, as in wash sales) provide no control over the transferred securities.
860-10-40-28
This guidance addresses whether any of the following agreements maintain effective control under paragraph 860-10-40-5(c)(2):
- aA call option or other right conveys more than a trivial benefit (that is, fails the condition in paragraph 860-10-40-5(c)(2)(ii)) if the price to be paid is fixed, determinable, or otherwise potentially advantageous, unless because that price is so far out of the money or for other reasons it is probable when the option is written that the transferor will not exercise it.
- bA transferor's unilateral ability to cause a securitization entity to return to the transferor or otherwise dispose of specific transferred financial assets, for example, in response to its decision to exit a market or a particular activity, has the characteristic in paragraph 860-10-40-5(c)(2)(i) and, thus, would provide the transferor with effective control over the transferred financial assets if it also has the characteristic in paragraph 860-10-40-5(c)(2)(ii)—that is, if it also provides more than a trivial benefit to the transferor.
- cA call option on readily obtainable assets at fair value may not provide the transferor with more than a trivial benefit.
860-10-40-28A
Effective control over transferred financial assets can be present even if the right to reclaim is indirect. For example, if a call allows a transferor to buy back the beneficial interests at a fixed price, the transferor may maintain effective control of the financial assets underlying those beneficial interests. If the transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing activities, that entity may be constrained from choosing to pledge or exchange the transferred financial assets. In that circumstance, any call held by the transferor on third-party beneficial interests is effectively an attached call on the transferred financial assets. Depending on the price and other terms of the call, the transferor may maintain effective control over the transferred financial assets.
860-10-40-30
See paragraphs 860-10-55-39 through 55-42C for implementation guidance addressing how different types of rights of a transferor to reacquire (call) transferred financial assets affect sale accounting under this Subtopic.
860-10-40-31
Cash-settled call options do not constrain the transferee, nor do they result in the transferor maintaining effective control because they do not provide the transferor with an opportunity to reclaim the transferred financial assets. Therefore, this guidance addresses call options that can be physically settled.
860-10-40-32
An embedded call option would not result in the transferor's maintaining effective control because it is the issuer rather than the transferor who holds the call option and the call option does not provide more than a trivial benefit to the transferor. For example, a call embedded by the issuer of a callable bond or the borrower of a prepayable mortgage loan would not provide the transferor with effective control over the transferred financial asset.
860-10-40-34
Paragraph 860-10-40-5(c)(2) excludes a cleanup call from the general principle that a transferor maintains effective control over transferred financial assets if the transferor has the unilateral ability to cause the holder to return specific financial assets and that ability provides more than a trivial benefit to the transferor. A cleanup call on beneficial interests in the transferred financial assets is permitted because burdensome costs in relation to benefits may arise when the remaining financial assets or beneficial interests fall to a small portion of their original level. Parties other than the servicer cannot hold the option, because only the servicer is burdened when the amount of outstanding financial assets falls to a level at which the cost of servicing the financial assets becomes burdensome—the defining condition of a cleanup call—and any other party would be motivated by some other incentive in exercising a call.
860-10-40-35
A right to reclaim specific transferred financial assets by paying their fair value when reclaimed generally does not maintain effective control if it does not convey a more-than-trivial benefit to the transferor. However, a transferor has maintained effective control if it has such a right and also holds the residual interest in the transferred financial assets. See paragraph 860-10-55-42A for discussion of a related example.
860-10-40-36
Many transfers of financial assets that involve transfers of a group of entire financial assets to an entity whose sole purpose is to engage in securitization or asset-backed financing activities empower the transferor to reclaim assets subject to certain restrictions. Such a power is sometimes called a removal-of-accounts provision. Whether a removal-of-accounts provision precludes sale accounting depends on whether the removal-of-accounts provision results in the transferor's maintaining effective control over transferred financial assets.
860-10-40-37
The following are examples of removal-of-accounts provisions that preclude transfers from being accounted for as sales:
- a An unconditional removal-of-accounts provision or repurchase agreement that allows the transferor to specify the financial assets that may be removed and that provides a more-than-trivial benefit to the transferor, because such a provision allows the transferor unilaterally to remove specific financial assets
- b A removal-of-accounts provision conditioned on a transferor's decision to exit some portion of its business that provides a more-than-trivial benefit to the transferor, because whether it can be triggered by canceling an affinity relationship, spinning off a business segment, or accepting a third party's bid to purchase a specified (for example, geographic) portion of the transferor's business, such a provision allows the transferor unilaterally to remove specific financial assets.
860-10-40-38
The following are examples of removal-of-accounts provisions that do not preclude transfers from being accounted for as sales:
- a A removal-of-accounts provision for random removal of excess financial assets, if the provision is sufficiently limited so that the transferor cannot remove specific transferred financial assets, for example, by limiting removals to the amount of the transferor's interests and to one removal per month
- b A removal-of-accounts provision for defaulted receivables, because the removal would be allowed only after a third party's action (default) and could not be caused unilaterally by the transferor
- c A removal-of-accounts provision conditioned on a third-party cancellation, or expiration without renewal, of an affinity or private-label arrangement, because the removal would be allowed only after a third party's action (cancellation) or decision not to act (expiration) and could not be caused unilaterally by the transferor
- d A removal-of-accounts provision that does not allow the transferor to unilaterally reclaim specific financial assets from the transferee.For related implementation guidance, see paragraph 860-10-55-41.
860-10-40-39
A removal-of-accounts provision that can be exercised only in response to a third party's action that has not yet occurred does not maintain the transferor's effective control over financial assets potentially subject to that removal-of-accounts provision.
Application of the Sale Criteria for Financial Instruments That Have the Potential to Be Assets or Liabilities
860-10-40-40
Certain recognized financial instruments, such as forward contracts and swaps, have the potential to be financial assets or financial liabilities. Accordingly, transfers of those financial instruments must meet the conditions of both paragraphs 405-20-40-1 and 860-10-40-5 to be derecognized. Paragraph 815-10-40-2 states that transfers of assets that are derivative instruments and subject to the requirements of Subtopic 815-10 but that are not financial assets shall be accounted for by analogy to this Subtopic. The same criteria shall be applied to transfers of nonfinancial derivative instruments that have the potential to become either assets or liabilities (for example, forward contracts and swaps).
Circumstances That Result in a Transferor Regaining Control of Financial Assets Previously Sold
860-10-40-41
A change in law or other circumstance may result in a transferred portion of an entire financial asset no longer meeting the conditions of a participating interest (see paragraph 860-10-40-6A) or the transferor's regaining control of transferred financial assets after a transfer that was previously accounted for as a sale, because one or more of the conditions in paragraph 860-10-40-5 are no longer met. See the related guidance beginning in paragraph 860-20-25-8.
860-10-50Disclosure
Source downloaded: .Record version 6df4aa25e2dc. Effective date must be checked in the source.
860-10-50-2
Overall guidance on Topic 860 disclosures is organized as follows:
- aDisclosure objectives
- bAggregation of certain disclosures
- cInvolvements by others.
860-10-50-3
The principal objectives of the disclosure requirements of this Topic are to provide financial statement users with an understanding of all of the following:
- aA transferor's continuing involvement, if any, with transferred financial assets
- bThe nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset, including the carrying amounts of those assets
- cHow servicing assets and servicing liabilities are reported under Subtopic 860-50
- dFor both of the following, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows:
- 1Transfers accounted for as sales, if a transferor has continuing involvement with the transferred financial assets
- 2Transfers of financial assets accounted for as secured borrowings.
- 1
860-10-50-4
The objectives in the preceding paragraph apply regardless of whether this Topic requires specific disclosures. The specific disclosures required by this Topic are minimum requirements, and an entity may need to supplement the required disclosures depending on any of the following:
- aThe facts and circumstances of a transfer
- bThe nature of an entity's continuing involvement with the transferred financial assets
- cThe effect of an entity's continuing involvement on the transferor's financial position, financial performance, and cash flows.
860-10-50-4A
Disclosures required by this Topic may be reported in the aggregate for similar transfers if separate reporting of each transfer would not provide more useful information to financial statement users. A transferor shall both:
- aDisclose how similar transfers are aggregated
- bDistinguish between transfers that are accounted for as secured borrowings and transfers that are accounted for as sales.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1Disclosures required by this Topic may be reported in the aggregate for similar transfers if separate reporting of each transfer would not provide more useful information to financial statement users. For interim and annual reporting periods, a transferor shall both:- aDisclose how similar transfers are aggregated
- bDistinguish between transfers that are accounted for as secured borrowings and transfers that are accounted for as sales.
860-10-50-5
In determining whether to aggregate the disclosures for multiple transfers, the reporting entity shall consider quantitative and qualitative information about the characteristics of the transferred financial assets, including all of the following:
- aThe nature of the transferor's continuing involvement
- bThe types of financial assets transferred
- cRisks related to the transferred financial assets to which the transferor continues to be exposed after the transfer and the change in the transferor's risk profile as a result of the transfer
- dThe guidance in paragraph 310-10-50-25 (for risks and uncertainties) and paragraphs (for concentrations involving loan product terms).
860-10-50-6
The disclosures shall be presented in a manner that clearly and fully explains to financial statement users the transferor's risk exposure related to the transferred financial assets and any restrictions on the assets of the entity. An entity shall determine, in light of the facts and circumstances, how much detail it must provide to satisfy disclosure requirements of this Topic and how it aggregates information for assets with different risk characteristics. The entity shall strike a balance between obscuring important information as a result of too much aggregation and excessive detail that may not assist financial statement users to understand the entity's financial position. For example, an entity shall not obscure important information by including it with a large amount of insignificant detail. Similarly, an entity shall not disclose information that is so aggregated that it obscures important differences between the different types of involvement or associated risks.
Involvements by Others
860-10-50-7
To apply the disclosures required in this Topic, an entity shall consider all involvements by the transferor, its consolidated affiliates included in the financial statements being presented, or its agents to be involvements by the transferor.
860-10-55Implementation Guidance and Illustrations
Source downloaded: .Record version 9cff3536c3d1. Effective date must be checked in the source.
Implementation Guidance
860-10-55-1
This Section is organized as follows:
- aScope
- aaConsolidation of transferee by transferor
- aaaApplication of the term transferred financial assets
- bIsolation of transferred financial assets
- cTransferee's right to pledge or exchange transferred financial assets
- dEffective control
- eApplication of sale conditions to specific transactions
- fClassification of transferred debt securities
- gRecognition of a sale in separate-entity financial statements.
- h
860-10-55-2
The following guidance addresses whether certain instruments and transactions are subject to the scope of this Subtopic (see Section 860-10-15), specifically:
- aExamples of transactions and activities that are included in the scope
- bApplication of the term transfer
- cApplication of the term financial asset
- dReacquisition by an entity of its own securities
- eExchange of one form of beneficial interest for another
- fDollar-roll repurchase transactions
- g
860-10-55-3
The guidance in this Topic applies to the following transactions and activities, among others:
- a
- bTransfers of equity method investments
- cTransfers of cost-method investments
- dWith respect to the guidance in paragraph 860-10-40-5 only, transfers of financial assets in desecuritization transactions.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
105-10-65-10The guidance in this Topic applies to the following transactions and activities, among others:- a
- bTransfers of equity method investments
- cTransfers of investments accounted for in accordance with Topic 321 on investments—equity securities
- dWith respect to the guidance in paragraph 860-10-40-5 only, transfers of financial assets in desecuritization transactions.
860-10-55-4
A payment of cash or a conveyance of noncash financial assets to the holder of a loan or other receivable in full or partial settlement of an obligation is not a transfer under this Subtopic. In addition, a loan syndication is not a transfer of financial assets. See paragraph 310-10-25-4 for further guidance on a loan syndication.
860-10-55-5
The following implementation guidance addresses whether certain instruments are financial assets, the transfer of which is subject to the guidance in this Subtopic, specifically:
- a
- bSecuritized stranded costs
- cJudgment from litigation
- dForward contract on a financial instrument
- eOwnership interest in a consolidated subsidiary by its parent if the subsidiary holds nonfinancial assets
- fInvestment in a nonconsolidated investee.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
105-10-65-10The following implementation guidance addresses whether certain instruments are financial assets, the transfer of which is subject to the guidance in this Subtopic, specifically:- a
- bSecuritized stranded costs
- cJudgment from litigation
- dForward contract on a financial instrument
- eOwnership interest in a consolidated subsidiary by its parent if the subsidiary holds nonfinancial assets
- fInvestment in a nonconsolidated investee.
- g
860-10-55-6
Lease receivables from sales-type and direct financing leases are made up of two components: the right to receive lease payments and guaranteed residual values. Lease payments for sales-type and direct financing leases involve requirements for lessees to pay cash to lessors and meet the definition of a financial asset. Residual values represent the lessor's estimate of the salvage value of the underlying asset at the end of the lease term and may be either guaranteed or unguaranteed. Residual values meet the definition of financial assets to the extent that they are guaranteed at the commencement of the lease. Thus, transfers of lease receivables from sales-type and direct financing leases are subject to the requirements of this Subtopic. Unguaranteed residual assets do not meet the definition of financial assets, nor do residual values guaranteed after commencement, and transfers of them are not subject to the requirements of this Subtopic.
860-10-55-7
The deregulation of utility rates charged for electric power generation has caused electricity-producing entities (utilities) to identify some of their electric power generation operations as stranded costs. Before deregulation, utilities typically expected to be reimbursed for costs through regulation of rates charged to customers. After deregulation, some of these costs may no longer be recoverable through unregulated rates. Hence, such potentially unrecoverable costs often are referred to as stranded costs. However, some of those stranded costs may be recovered through a surcharge or tariff imposed on rate-regulated goods or services provided by another portion of the entity whose pricing remains regulated. Some entities have securitized their enforceable rights to impose that tariff (often referred to as securitized stranded costs), thereby obtaining cash from investors in exchange for the future cash flows to be realized from collecting surcharges imposed on customers of the rate-regulated goods or services.
860-10-55-8
Securitized stranded costs are not financial assets, and therefore transfers of securitized stranded costs are not within the scope of this Subtopic. Securitized stranded costs are not financial assets because they are imposed on ratepayers by a state government or its regulatory commission and, thus, while an enforceable right for the utility, they are not a contractual right to receive payments from another party. To elaborate, while a right to collect cash flows exists, it is not the result of a contract and, thus, not a financial asset.
860-10-55-9
However, beneficial interests in a securitization trust that holds nonfinancial assets such as securitized stranded costs or other similar imposed rights would be considered financial assets by the third-party investors, unless that third party must consolidate the trust. The Variable Interest Entities Subsections of Subtopic 810-10 should be applied, together with other guidance on consolidation policy, as appropriate, to determine whether such a special-purpose entity should be consolidated by a third-party investor.
860-10-55-10
A judgment from litigation is generally not a financial asset. However, the determination depends on the facts and circumstances. A contingent receivable that ultimately may require the payment of cash but does not as yet arise from a contract (such as a contingent receivable for a tort judgment) is not a financial asset. However, when that judgment becomes enforceable by a government or a court of law and is thereby contractually reduced to a fixed payment schedule, the judgment would be a financial asset.
860-10-55-11
A judgment from litigation is a financial asset if it is transferred to an unrelated third party and would be within the scope of this Subtopic only if that judgment is enforceable by a government or a court of law and has been contractually reduced to a fixed payment schedule.
860-10-55-12
A forward contract to purchase or sell a financial instrument that must be (or may be) net settled or physically settled by exchanging that financial instrument for cash (or some other financial asset) is a financial asset or financial liability. Therefore, because a forward contract on a financial instrument that must be (or may be) physically settled by the delivery of that financial instrument in exchange for cash is a financial asset or financial liability, the transfer of such a financial asset is within the scope of this Subtopic (see paragraph 405-20-40-1 for guidance on extinguishments of liabilities).
860-10-55-13
An ownership interest in a consolidated subsidiary is evidence of control of the entity's individual assets and liabilities, not all of which are financial assets, and this guidance only applies to transfers of financial assets. (Note that in the parent's [transferor's] consolidated financial statements, the subsidiary's holdings are reported as individual assets and liabilities instead of as a single investment.) The guidance in this Subtopic does not apply to a transfer of an ownership interest in a consolidated subsidiary by its parent if that consolidated subsidiary holds nonfinancial assets.
860-10-55-14
An entity (for example, a broker-dealer or an investment company) that carries an investment in a subsidiary at fair value will realize its investment by disposing of it rather than by realizing the values of the underlying assets through operations. Therefore, a transfer of an investment in a subsidiary by that entity is a transfer of the investment (a financial asset), not the underlying assets and liabilities (which might include nonfinancial assets). Generally, the guidance in this Subtopic applies to a transfer of an investment in a controlled entity that has not been consolidated by an entity because that entity accounts for its investment in the controlled entity at fair value.
860-10-55-14A
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
105-10-65-10An entity may have an unconditional right to consideration from a customer that gives rise to a receivable before the entity transfers control of a good or service to the customer. A receivable recognized in accordance with paragraph 606-10-45-4 that meets the definition of a financial asset is subject to the requirements of this Subtopic.860-10-55-15
A reacquisition by an entity of its own securities by exchanging noncash financial assets (for example, U.S. Treasury bonds or shares of an unconsolidated investee) for its common shares constitutes a distribution by an entity to its owners, as defined in FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, is excluded from the scope of this Subtopic.
Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance:
105-10-65-9A reacquisition by an entity of its own securities by exchanging noncash financial assets (for example, U.S. Treasury bonds or shares of an unconsolidated investee) for its common shares constitutes a distribution by an entity to its owners and, therefore, is excluded from the scope of this Subtopic. 860-10-55-16
A transferor's exchange of one form of beneficial interests in financial assets that have been transferred into a trust that is consolidated by the transferor for an equivalent, but different, form of beneficial interests in the same transferred financial assets would not be a transfer under this Subtopic if the exchange is with the trust that initially issued the beneficial interests. If the exchange is not a transfer, then the provisions of paragraph 860-20-40-1B would not be applied to the transaction.
860-10-55-17
A transfer of financial assets under a dollar-roll repurchase agreement is within the scope of this Subtopic if that agreement arises in connection with a transfer of existing securities. In contrast, dollar-roll repurchase agreements for which the underlying securities being sold do not yet exist or are to be announced (for example, to-be-announced Government National Mortgage Association [GNMA] rolls) are outside the scope of this Subtopic because those transactions do not arise in connection with a transfer of recognized financial assets. See paragraph 860-10-55-60 for related guidance.
860-10-55-17A
The purpose of this implementation guidance is to illustrate the characteristics of a transaction comprising an initial transfer and a repurchase financing and to preclude an analogy to other financing transactions that are outside the scope of the guidance in paragraph 860-10-40-4C, which states that items (b) through (c) in paragraph 860-10-40-4 do not apply to a transfer of financial assets and a related repurchase financing.
Transfer of a Financial Asset Initial Transferor a Cash Initial transferee Transfer of a Financial Asset b (as collateral) Cash c Return of Financial Asset Cash
860-10-55-17B
The diagram in the preceding paragraph depicts the following three transfers of a financial asset that typically occur in the transactions within the scope of the guidance in paragraph 860-10-40-4C:
- aThe initial transferor transfers a financial asset to the initial transferee in return for cash.
- bThe initial transferee enters into a repurchase financing with the initial transferor. The initial transferee transfers the previously transferred financial asset to the initial transferor as collateral for the financing. The initial transferee receives cash from the initial transferor. As part of the repurchase financing, the initial transferee is obligated to repurchase the financial asset (or substantially the same financial asset) at a fixed price within a prescribed time period.
- cThe initial transferee makes the required payment to the initial transferor under the terms of the repurchase financing. Upon receipt of payment, the initial transferor returns the transferred asset (or substantially the same asset) to the initial transferee.
860-10-55-17C
Whether or not the parties agree to net settle the steps in items (a) and (b) of the preceding paragraph shall not affect whether the transactions are within the scope of the guidance for repurchase financings in paragraph 860-10-40-4C.
860-10-55-17D
Paragraph 860-10-40-4 states that the determination of whether a transferor and its consolidated affiliates included in the financial statements being presented have surrendered control over transferred financial assets shall first consider whether the transferee would be consolidated by the transferor.If all other provisions of this Topic are met with respect to a particular transfer, and the transferee would be consolidated by the transferor, then the transferred financial assets would not be treated as having been sold in the financial statements being presented. However, if the transferee is a consolidated subsidiary of the transferor (its parent), the transferee shall recognize the transferred financial assets in its separate entity financial statements, unless the nature of the transfer is a secured borrowing with a pledge of collateral (for example, a repurchase agreement that would not be accounted for as a sale under the provisions of paragraph 860-10-40-24).
860-10-55-17E
This implementation guidance addresses the application of what constitutes an entire financial asset.
860-10-55-17F
A loan to one borrower in accordance with a single contract that is transferred to a securitization entity before securitization shall be considered an entire financial asset. Similarly, a beneficial interest in securitized financial assets after the securitization process has been completed shall be considered an entire financial asset. In contrast, a transferred interest in an individual loan shall not be considered an entire financial asset; however, if the transferred interest meets the definition of a participating interest, the participating interest would be eligible for sale accounting.
860-10-55-17G
In a transaction in which the transferor creates an interest-only strip from a loan and transfers the interest-only strip, the interest-only strip does not meet the definition of an entire financial asset (and an interest-only strip does not meet the definition of a participating interest; therefore, sale accounting would be precluded). In contrast, if an entire financial asset is transferred to a securitization entity that it does not consolidate and the transfer meets the conditions for sale accounting, the transferor may obtain an interest-only strip as proceeds from the sale. An interest-only strip received as proceeds of a sale is an entire financial asset for purposes of evaluating any future transfers that could then be eligible for sale accounting.
860-10-55-17H
If multiple advances are made to one borrower in accordance with a single contract (such as a line of credit, credit card loan, or a construction loan), an advance on that contract would be a separate unit of account if the advance retains its identity, does not become part of a larger loan balance, and is transferred in its entirety. However, if the transferor transfers an advance in its entirety and the advance loses its identity and becomes part of a larger loan balance, the transfer would be eligible for sale accounting only if the transfer of the advance does not result in the transferor retaining any interest in the larger balance or if the transfer results in the transferor's interest in the larger balance meeting the definition of a participating interest. Similarly, if the transferor transfers an interest in an advance that has lost its identity, the interest must be a participating interest in the larger balance to be eligible for sale accounting.
860-10-55-17I
Paragraph 860-10-40-6A(b) states that an allocation of specified cash flows precludes a portion from meeting the definition of a participating interest unless each cash flow is proportionately allocated to the participating interest holders. Following are several examples implementing that guidance:
- aIn the circumstance of an individual loan in which the borrower is required to make a contractual payment that consists of a principal amount and interest amount on the loan, the transferor and transferee shall share in the principal and interest payments on the basis of their proportionate ownership interest in the loan.
- bIn contrast, if the transferor is entitled to receive an amount that represents the principal payments and the transferee is entitled to receive an amount that represents the interest payments on the loan, that arrangement would not be consistent with the participating interest definition because the transferor and transferee do not share proportionately in the cash flows received from the loan.
- cIn other circumstances, a transferor may transfer a portion of an individual loan that represents either a senior interest or a junior interest in an individual loan. In both of those circumstances, the transferor would account for the transfer as a secured borrowing because the senior interest or junior interest in the loan do not meet the requirements to be participating interests (see paragraph 860-10-40-6A(c)).
860-10-55-17J
Given the conditions in paragraph 860-10-40-6A(b)(1), cash flows allocated as compensation for services performed that are significantly above an amount that would fairly compensate a substitute service provider would result in a disproportionate division of cash flows of the entire financial asset among the participating interest holders and, therefore, would preclude the portion of a transferred financial asset from meeting the definition of a participating interest. Examples of cash flows that are compensation for services performed include all of the following:
- aLoan origination fees paid by the borrower to the transferor
- bFees necessary to arrange and complete the transfer paid by the transferee to the transferor
- cFees for servicing the financial asset.
860-10-55-17K
The transfer of a portion of an entire financial asset may result in a gain or loss on the transfer if the contractual interest rate on the entire financial asset differs from the market rate at the time of transfer. Paragraph 860-10-40-6A(b)(2) precludes a portion from meeting the definition of a participating interest if the transfer results in the transferor receiving an ownership interest in the financial asset that permits it to receive disproportionate cash flows. For example, if the transferor transfers an interest in an entire financial asset and the transferee agrees to incorporate the excess interest (between the contractual interest rate on the financial asset and the market interest rate at the date of transfer) into the contractually specified servicing fee, the excess interest would likely result in the conveyance of an interest-only strip to the transferor from the transferee. An interest-only strip would result in a disproportionate division of cash flows of the financial asset among the participating interest holders and would preclude the portion from meeting the definition of a participating interest.
860-10-55-17L
Paragraph 860-10-40-6A(c) addresses the priority of cash flows. In certain transfers, recourse is provided to the transferee that requires the transferor to reimburse any premium paid by the transferee if the underlying financial asset is prepaid within a defined time frame of the transfer date. Such recourse would preclude the transferred portion from meeting the definition of a participating interest. However, once the recourse provision expires, the transferred portion shall be reevaluated to determine if it meets the participating interest definition.
860-10-55-17M
Paragraph 860-10-40-6A(c) addresses recourse in a participating interest. Recourse in the form of an independent third-party guarantee shall be excluded from the evaluation of whether the participating interest definition is met. Similarly, cash flows allocated to a third-party guarantor for the guarantee fee shall be excluded from the determination of whether the cash flows are divided proportionately among the participating interest holders.
860-10-55-17N
Examples of standard representations and warranties (as used in paragraph 860-10-40-6A(c)) include representations and warranties about any of the following:
- aThe characteristics, nature, and quality of the underlying financial asset, including any of the following:
- 1Characteristics of the underlying borrower
- 2The type and nature of the collateral securing the underlying financial asset.
- 1
- bThe quality, accuracy, and delivery of documentation relating to the transfer and the underlying financial asset
- cThe accuracy of the transferor's representations in relation to the underlying financial asset.
860-10-55-18
This implementation guidance addresses the isolation condition in paragraph 860-10-40-5(a)and applies to transfers of all entities, including institutions for which the FDIC would be the receiver.
860-10-55-18A
In the context of U.S. bankruptcy laws, a true sale opinion from an attorney is often required to support a conclusion that transferred financial assets are isolated from the transferor, any of its consolidated affiliates included in the financial statements being presented, and its creditors. In addition, a nonconsolidation opinion is often required if the transfer is to an affiliated entity. In the context of U.S. bankruptcy laws:
- aA true sale opinion is an attorney's conclusion that the transferred financial assets have been sold and are beyond the reach of the transferor's creditors and that a court would conclude that the transferred financial assets would not be included in the transferor's bankruptcy estate.
- bA nonconsolidation opinion is an attorney's conclusion that a court would recognize that an entity holding the transferred financial assets exists separately from the transferor. Additionally, a nonconsolidation opinion is an attorney's conclusion that a court would not order the substantive consolidation of the assets and liabilities of the entity holding the transferred financial assets and the assets and liabilities of the transferor (and its consolidated affiliates included in the financial statements being presented) in the event of the transferor's bankruptcy or receivership.
860-10-55-18B
A legal opinion may not be required if a transferor has a reasonable basis to conclude that the appropriate legal opinion(s) would be given if requested. For example, the transferor might reach a conclusion without consulting an attorney if either of the following conditions exists:
- aThe transfer is a routine transfer of financial assets that does not result in any continuing involvement by the transferor.
- bThe transferor had experience with other transfers with similar facts and circumstances under the same applicable laws and regulations.
860-10-55-18C
For entities that are subject to other possible bankruptcy, conservatorship, or other receivership procedures (for example, banks subject to receivership by the Federal Deposit Insurance Corporation [FDIC]) in the United States or other jurisdictions, judgments about whether transferred financial assets have been isolated shall be made in relation to the powers of bankruptcy courts or trustees, conservators, or receivers in those jurisdictions.
860-10-55-19
In certain securitizations, a corporation that, if it failed, would be subject to the U.S. Bankruptcy Code transfers financial assets to a securitization entity in exchange for cash. The entity raises that cash by issuing to investors beneficial interests that pass through all cash received from the financial assets, and the transferor has no further involvement with the trust or the transferred financial assets. Those securitizations generally would be judged as having isolated the assets because, in the absence of any continuing involvement there would be reasonable assurance that the transfer would be found to be a true sale at law that places the assets beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors, even in bankruptcy or other receivership.
860-10-55-20
In other securitizations, a similar corporation transfers financial assets to a securitization entity in exchange for cash and beneficial interests in the transferred financial assets. That entity raises the cash by issuing to investors commercial paper that gives them a senior beneficial interest in cash received from the financial assets. The beneficial interests obtained by the transferring corporation represent a junior interest to be reduced by any credit losses on the financial assets in the entity. The senior beneficial interests (commercial paper) are highly rated by credit rating agencies only if both the credit enhancement from the junior interest is sufficient and the transferor is highly rated.
860-10-55-21
Depending on facts and circumstances, those single-step securitizations often would be judged in the United States as not having isolated the financial assets, because the nature of the continuing involvement may make it difficult to obtain reasonable assurance that the transfer would be found to be a true sale at law that places the financial assets beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors in U.S. bankruptcy (see paragraph 860-10-55-46). If the transferor fell into bankruptcy and the transfer was found not to be a true sale at law, investors in the transferred financial assets might be subjected to an automatic stay that would delay payments due them, and they might have to share in bankruptcy expenses and suffer further losses if the transfer was recharacterized as a secured loan.
860-10-55-22
Other securitizations use multiple transfers intended to isolate transferred financial assets beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors, even in bankruptcy. The series of transactions in a typical two-tier structure taken as a whole may satisfy the isolation test because the design of the structure achieves isolation. The two-step securitizations, taken as a whole, generally would be judged under present U.S. law as having isolated the financial assets beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, and its creditors, even in bankruptcy or other receivership. However, each entity involved in a transfer should be evaluated under the consolidation guidance in Topic 810. Accordingly, a transferor could be required to consolidate the trust or other legal vehicle used in the second step of the securitization, notwithstanding the isolation analysis of the transfer.
860-10-55-23
For example, two-step structures involve the following:
- aFirst, the corporation transfers a group of financial assets to a special-purpose corporation that, although wholly owned, is so designed that the possibility is remote that the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, or its creditors could reclaim the financial assets. This first transfer is designed to be judged to be a true sale at law, in part because the transferor does not provide excessive credit or yield protection to the special-purpose corporation, and the transferred financial assets are likely to be judged beyond the reach of the transferor, its consolidated affiliates (that are not bankruptcy-remote entities) included in the financial statements being presented, or the transferor's creditors even in bankruptcy or other receivership.
- bSecond, the special-purpose corporation transfers a group of financial assets to a trust or other legal vehicle with a sufficient increase in the credit or yield protection on the second transfer (provided by a transferor's junior beneficial interest or other means) to merit the high credit rating sought by third-party investors who buy senior beneficial interests in the trust. Because of that aspect of its design, that second transfer might not be judged to be a true sale at law and, thus, the transferred financial assets could at least in theory be reached by a bankruptcy trustee for the special-purpose corporation.
- cHowever, the special-purpose corporation is designed to make remote the possibility that it would enter bankruptcy, either by itself or by substantive consolidation into a bankruptcy of its parent should that occur. For example, its charter forbids it from undertaking any other business or incurring any liabilities, so that there can be no creditors to petition to place it in bankruptcy. Furthermore, its dedication to a single purpose is intended to make it extremely unlikely, even if it somehow entered bankruptcy, that a receiver under the U.S. Bankruptcy Code could reclaim the transferred financial assets because it has no other assets to substitute for the transferred financial assets.
860-10-55-24
The powers of receivers for entities not subject to the U.S. Bankruptcy Code (for example, banks subject to receivership by the Federal Deposit Insurance Corporation [FDIC]) vary considerably, and therefore some receivers may be able to reach financial assets transferred under a particular arrangement and others may not. A securitization may isolate transferred financial assets from a transferor subject to such a receiver and its creditors even though it is accomplished by only one transfer directly to a securitization entity that issues beneficial interests to investors and the transferor provides credit or yield protection. For entities that are subject to other possible bankruptcy, conservatorship, or other receivership procedures in the United States or other jurisdictions, judgments about whether transferred financial assets have been isolated need to be made in relation to the powers of bankruptcy courts or trustees, conservators, or receivers in those jurisdictions.
860-10-55-24A
Depending on the facts and circumstances, transferred financial assets can be isolated from the transferor if the Federal Deposit Insurance Corporation (FDIC) would be the receiver should the transferor fail. In July 2000, the FDIC adopted a final rule (subsequently amended), Treatment by the Federal Deposit Insurance Corporation as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection with a Securitization or Participation. The final amended rule modifies the FDIC's receivership powers so that, subject to certain conditions, it shall not recover, reclaim, or recharacterize as property of the institution or the receivership any financial assets transferred by an insured depository institution that meet all conditions for sale accounting treatment under GAAP, other than the legal isolation condition in connection with a securitization or participation.
860-10-55-24B
Financial assets transferred by an entity subject to possible receivership by the FDIC are isolated from the transferor if the FDIC or another creditor either cannot require return of the transferred financial assets or can only require return in receivership, after a default, and in exchange for payment of, at a minimum, principal and interest earned (at the contractual yield) to the date investors are paid.
860-10-55-25
Conversely, financial assets transferred by an entity shall not be considered isolated from the transferor if circumstances can arise under which the transferor can require their return, but only in exchange for payment of principal and interest earned (at the contractual yield) to the date investors are paid, unless the transferor's power to require the return of the transferred financial assets arises solely from a contract with the transferee. A noncontractual power to require the return of transferred assets is inconsistent with the limitations in paragraph 860-10-40-5(a) that, to be accounted for as having been sold, transferred financial assets shall be isolated from the transferor. That is the circumstance even if the noncontractual power appears unlikely to be exercised or is dependent on the uncertain future actions of other entities (for example, insufficiency of collections on underlying transferred financial assets or determinations by court of law). Under that guidance, a single-step securitization commonly used by financial institutions subject to receivership by the FDIC and sometimes used by other entities is likely not to be judged as having isolated the assets. One reason for that is because it would be difficult to obtain reasonable assurance that the transferor would be unable to recover the transferred financial assets under the equitable right of redemption available to secured debtors, after default, under U.S. law.
860-10-55-25A
For entities that are subject to possible receivership under jurisdictions other than the FDIC or the U.S. Bankruptcy Code, whether assets transferred by an entity can be considered isolated from the transferor depends on the circumstances that apply to those types of entities. As discussed in paragraph 860-10-55-24, for entities that are subject to other possible bankruptcy, conservatorship, or other receivership procedures in the United States or other jurisdictions, judgments about whether transferred financial assets have been isolated need to be made in relation to the powers of bankruptcy courts or trustees, conservators, or receivers in those jurisdictions. The same sorts of judgments may need to be made in relation to powers of the transferor or its creditors.
860-10-55-26
The following provides implementation guidance on the application of the condition in paragraph 860-10-40-5(b) related to the transferee's right to pledge or exchange transferred assets in certain circumstances and transactions, specifically:
- aTransferee is precluded from exchanging the transferred financial assets but has the unconstrained right to pledge them.
- bTransferee is significantly limited in its ability to pledge or exchange the transferred financial assets.
- cTransferor's approval is required for transferee's subsequent transfers or pledges.
- dTransactions involving Rule 144A securities.
860-10-55-27
In a transaction in which a transferee (that is not an entity whose sole purpose is to engage in securitization or asset-backed financing activities) is precluded from exchanging the transferred financial assets but obtains the unconstrained right to pledge them, the determination of whether the sale condition in paragraph 860-10-40-5(b) is met depends on the facts and circumstances. In a transfer of financial assets, a transferee's right to both pledge and exchange transferred financial assets suggests that the transferor has surrendered its control over those financial assets. However, more careful analysis is warranted if the transferee may only pledge the transferred financial assets.
860-10-55-28
An entity transfers financial assets to a transferee that is significantly limited in its ability to pledge or exchange the transferred financial assets (the transferee is not an entity whose sole purpose is to engage in securitization or asset-backed financing activities). The transferor receives cash in return for the transferred financial assets, and has no continuing involvement with the transferred assets. The transfer described in this example meets the condition in paragraph 860-10-40-5(b).
860-10-55-29
While the condition in paragraph 860-10-40-5(b) is met in the example described in the previous paragraph, in general, for transfers in which the transferor does have any continuing involvement, an evaluation shall be made as to whether the condition in paragraph 860-10-40-5(b) has been met.
860-10-55-30
For a transfer to fail to meet the condition in paragraph 860-10-40-5(b), the transferee must be constrained from pledging or exchanging the transferred financial asset and the transferor must receive more than a trivial benefit as a result of the constraint.
860-10-55-31
Judgment is necessary to determine whether a requirement to obtain the transferor's permission to sell or exchange should preclude sale accounting. For example, in certain loan participation agreements involving transfers of participating interests, the transferor is required to approve any subsequent transfers or pledges of the interests in the loans held by the transferee. Whether that requirement would be a constraint that would prevent the transferee from taking advantage of its right to pledge or to exchange the transferred financial asset and, therefore, accounting for the transfer as a sale, depends on the nature of the requirement for approval.
860-10-55-32
A prohibition on sale to the transferor's competitor may or may not constrain a transferee from pledging or exchanging the financial asset, depending on how many other potential buyers exist. If there are many other potential willing buyers, the prohibition would not be constraining. In contrast, if that competitor were the only potential willing buyer (other than the transferor), then the condition would be constraining.
860-10-55-33
Issuing beneficial interests in the form of securities issued under Rule 144A presumptively would not constrain a transferee's ability to transfer those beneficial interests for purposes of this Subtopic. The primary limitation imposed by Rule 144A is that a potential buyer must be a sophisticated investor. If a large number of qualified buyers exist, the holder could transfer those securities to many potential buyers and, thereby, realize the full economic benefit of the assets. In such circumstances, the requirements of Rule 144A would not be a constraint that precludes sale accounting under paragraph 860-10-40-5(b).
860-10-55-34
The following provides implementation guidance related to the effective control condition and related examples in paragraph 860-10-40-5(c), specifically:
- aAn agreement that both entitles and obligates the transferor to repurchase or redeem the transferred financial assets before their maturity (see paragraph 860-10-40-5(c)(1)):
- 1Whether financial assets exchanged are substantially the same
- 2
- 1
- bAn agreement that provides the transferor with the unilateral ability to cause the holder to return specific financial assets, other than through a cleanup call (see paragraph 860-10-40-5(c)(2)):
- 1Rights to reacquire (call) transferred assets.
- 1
- cAn agreement that permits the transferee to require the transferor to repurchase the transferred financial asset at a price that is so favorable to the transferee that it is probable that the transferee will require the transferor to repurchase the transferred financial asset.
860-10-55-35
This guidance addresses criteria that must be met for a transfer to fail the condition in paragraph 860-10-40-5(c) through an agreement of the type described in paragraph 860-10-40-5(c)(1), precluding sale accounting and resulting, instead, in secured-borrowing accounting. The following are examples of whether securities exchanged are substantially the same as discussed in paragraph 860-10-40-24:
- aThe same primary obligor (see paragraph 860-10-40-24(a)(1)). The exchange of pools of single-family loans would not meet this criterion because the mortgages comprising the pool do not have the same primary obligor, and would therefore not be considered substantially the same.
- bIdentical form and type (see paragraph 860-10-40-24(a)(2)). The following exchanges would not meet this criterion:
- 1GNMA I securities for GNMA II securities
- 2Loans to foreign debtors that are otherwise the same except for different U.S. foreign tax credit benefits (because such differences in the tax receipts associated with the loans result in instruments that vary in form and type)
- 3Commercial paper for redeemable preferred stock.
- 1
- cThe same maturity (or in the case of mortgage-backed pass-through and pay-through securities, similar remaining weighted-average maturities that result in approximately the same market yield) (see paragraph 860-10-40-24(a)(3)). The exchange of a fast-pay GNMA certificate (that is, a certificate with underlying mortgage loans that have a high prepayment record) for a slow-pay GNMA certificate would not meet this criterion because differences in the expected remaining lives of the certificates result in different market yields.
- dSimilar assets as collateral (see paragraph 860-10-40-24(a)(5)). Mortgage-backed pass-through and pay-through securities must be collateralized by a similar pool of mortgages, such as single-family residential mortgages, to meet this characteristic.
860-10-55-39
Rights or obligations to reacquire transferred financial assets may result in the transferor's maintaining effective control over the transferred assets, therefore precluding sale accounting under paragraph 860-10-40-5(c). The following guidance addresses how different types of rights of a transferor to reacquire (call) transferred assets affect sale accounting, specifically:
- aRemoval-of-accounts provisions (see paragraphs )
- bCall options (see paragraphs 860-10-40-28 and 860-10-40-34)
- cOther arrangements.
860-10-55-41
The following are examples of application of effective control principles to removal-of-accounts provisions:
- aAn unconditional removal-of-accounts provision that allows the transferor to specify the financial assets that may be removed from a group of financial assets precludes sale accounting for all financial assets in the group that might be specified if such a provision allows the transferor unilaterally to remove specific financial assets and provides a more-than-trivial benefit to the transferor (see paragraph 860-10-40-37(a)), even if the transferor's right to remove specific financial assets from a group of transferred financial assets is limited, for example, to 10 percent of the fair value of the financial assets transferred and all of the financial assets are smaller than that 10 percent. In that circumstance, none of the transferred financial assets would be derecognized at the time of transfer because no transferred financial asset is beyond the reach of the transferor. If the transferor reclaims all the financial assets it can and thereby extinguishes its option, its control has expired and the rest of the financial assets have been sold at that time.
- bA removal-of-accounts provision that provides the right to random removal of excess financial assets from a group of transferred financial assets up to 10 percent of the fair value of the financial assets transferred (all financial assets in the group are less than this 10 percent of the fair value of transferred financial assets) does not preclude sale accounting if the transferor has no other interest in the group. The transferor has, in essence, obtained a 10 percent beneficial interest in the group and should account for it as such. This treatment is permitted because the removal-of-accounts provision is sufficiently limited and the transferor cannot unilaterally remove specific transferred financial assets, because the timing of the removal (when the excess develops) and the assets being removed (which are randomly determined) are not under the control of the transferor (see paragraph 860-10-40-38).
- cA removal-of-accounts provision conditioned on a transferor's decision to exit some portion of its business precludes sale accounting for all financial assets that might be affected, because it permits the transferor unilaterally to remove specific financial assets and provides a more-than-trivial-benefit to the transferor (see paragraph 860-10-40-37(b)).
- dA removal-of-accounts provision for defaulted receivables does not preclude sale accounting at the time of transfer, because the removal would be allowed only after a third party's action (default) and could not be caused unilaterally by the transferor (see paragraph 860-10-40-38(b)). However, once the default has occurred, the transferor would have the unilateral ability to remove those specific financial assets and would need to recognize the defaulted receivable if that ability provides a more-than-trivial benefit to the transferor.
- eA removal-of-accounts provision conditioned on a third-party cancellation, or expiration without renewal, of an affinity or private-label arrangement does not preclude sale accounting at the time of transfer, because the removal would be allowed only after a third party's action (cancellation) or decision not to act (expiration) and could not be caused unilaterally by the transferor (see paragraph 860-10-40-38(c)). However, once the cancellation or expiration has occurred, the transferor would have the unilateral ability to remove specific financial assets and would need to recognize those financial assets if that ability provides a more-than-trivial benefit to the transferor.
- fBecause the transferor could not cause the reacquisition unilaterally a transferor does not maintain effective control through a removal-of-accounts provision that obligates the transferor to reacquire transferred financial assets from a securitization entity only after either:
- 1A specified failure of the servicer to properly service the transferred financial assets that could result in the loss of a third-party guarantee
- 2Third-party beneficial interest holders require a securitization entity to repurchase that beneficial interest.
- 1
860-10-55-42
The following are other examples of the application of effective control principles:
- aIn a loan participation, the lead bank (that is also the transferor) allows the participating bank to resell but reserves the right to call at any time from whoever holds it and can enforce the call option by cutting off the flow of interest at the call date; such a call option precludes sale accounting.
- bIn a securitization, a call option permits the transferor to reclaim all of the transferred financial assets from the securitization entity at any time; such a call option precludes sale accounting unless both of the following conditions exist:
- 1The call option is an option to call, at fair value, a financial asset that is readily obtainable in the marketplace.
- 2The transferor does not hold a residual beneficial interest in the transferred financial assets (see paragraph 860-10-40-35).
- 1
- cA transferor-servicer transfers a group of entire financial assets to a securitization entity and has the right to call all of the financial assets when the group amortizes to 20 percent of its value (determined at the date of transfer). The transferor-servicer determines that at that level of financial assets, its cost of servicing them would not be burdensome in relation to the benefits of servicing, and therefore that the call option is not a cleanup call. Such a call option precludes sale accounting for the entire group of transferred financial assets (see paragraph 860-10-55-70).
- dIf the third-party beneficial interests contain an embedded option and the transferor holds the residual interest in the securitization entity, the combination has the same kind of effective control as a scheduled auction provision if the transferor holds a residual beneficial interest. Sale accounting would be precluded for all of the transferred financial assets affected by the call option.
- eIf the third-party beneficial interests in a securitization entity pay off first (a so-called turbo structure, where principal payments and prepayments are allocated on a non-pro rata basis, as discussed in paragraph 860-10-05-13), the transferor may not maintain effective control over transferred financial assets (see paragraph 860-10-40-32). To some extent, these repayments are contractual cash flows of the underlying assets, but repayments also result from prepayments in the underlying assets (that is, the prepayment options in the underlying assets are mirrored in the third-party beneficial interests). In this circumstance, call options embedded in the third-party beneficial interests result from the options embedded in the underlying assets (that is, they are held by the underlying borrowers rather than the transferor), and thus do not preclude sale accounting.
- fA transferor's contractual right to repurchase, at any time, a loan that is not a readily obtainable financial asset would preclude sale accounting, because the transferor's contractual right to repurchase is effectively a call option of the type described in paragraph 860-10-40-17(c)(2).
860-10-55-42A
This guidance illustrates the concept in paragraph 860-10-40-35 that a transferor maintains effective control if it has a right to reclaim specific transferred assets by paying fair value and also holds the residual interest in the transferred financial assets.If a transferor holds the residual interest in securitized financial assets and can reclaim the transferred financial assets at termination of the securitization entity by purchasing them in an auction, and thus at what might appear to be fair value, then sale accounting for the transfer of those financial assets it can reclaim would be precluded. Such circumstances provide the transferor with a more-than-trivial benefit and effective control over the financial assets, because it can pay any price it chooses in the auction and recover any excess paid over fair value through its residual interest in the transferred financial assets.
860-10-55-42B
Sale accounting is not appropriate if a cleanup call on a group of financial assets in a securitization entity is held by a party other than the servicer. A transferor's call option on the transferred financial assets in the securitization entity is not a cleanup call for accounting purposes because it is not the servicer or an affiliate of the servicer. in which the fair value of beneficial interests obtained by a transferor of financial assets that is not the servicer or an affiliate of the servicer is adversely affected by the amount of transferred financial assets declining to a low level.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
105-10-65-10Sale accounting is not appropriate if a cleanup call on a group of financial assets in a securitization entity is held by a party other than the servicer. A transferor's call option on the transferred financial assets in the securitization entity is not a cleanup call for accounting purposes because it is not the servicer or an affiliate of the servicer. This is the case even when the fair value of beneficial interests obtained by a transferor of financial assets that is not the servicer or an affiliate of the servicer is adversely affected by the amount of transferred financial assets declining to a low level.860-10-55-42C
In a securitization transaction involving not-readily-obtainable financial assets, a transferor that is also the servicer may hold a cleanup call if it enters into a subservicing arrangement with a third party without precluding sale accounting. Under a subservicing arrangement, the transferor remains the servicer from the perspective of the securitization entity because the securitization entity does not have an agreement with the subservicer (that is, the transferor remains liable if the subservicer fails to perform under the subservicing arrangement). However, if the transferor sells the servicing rights to a third party (that is, the agreement for servicing is between the securitization entity and the third party after the sale of the servicing rights), then the transferor could not hold a cleanup call without precluding sale accounting.
860-10-55-42D
This implementation guidance addresses the application of paragraph 860-10-40-5(c)(3) through the following examples:
- aA put option written to the transferee generally does not provide the transferor with effective control over the transferred financial asset under paragraph 860-10-40-5(c)(3).
- bA put option that is sufficiently deep in the money when it is written would, under that paragraph, provide the transferor effective control over the transferred financial asset because it is probable that the transferee will exercise the option and the transferor will be required to repurchase the transferred financial asset.
- cA sufficiently out-of-the-money put option held by the transferee would not provide the transferor with effective control over the transferred financial asset if it is probable when the option is written that the option will not be exercised.
- dA put option held by the transferee at fair value would not provide the transferor with effective control over the transferred financial asset.
860-10-55-43
The following provides implementation guidance regarding the application of the sale conditions in paragraph 860-10-40-5 to certain transactions, specifically:
- aPass-through, pay-through, and revolving-period securitizations
- bFactoring arrangements
- cTransfers of receivables with recourse
- dSecurities lending transactions
- eRepurchase agreements
- fWash sales
- gDollar rolls
- hLoan participations
- iBanker's acceptances and risk participations in them
- j
- kTransfers involving certain transferor powers
- lTransferor option to repurchase individual financial assets
- mTransfer of a short-term loan made under a long-term credit commitment
- nTransfer of bad-debt recovery rights.
- o
860-10-55-44
Paragraphs provide background on securitization transactions. In pass-through and pay-through securitizations, receivables are transferred to the entity at the inception of the securitization, and no further transfers are made; all cash collections are paid to the holders of beneficial interests in the entity. Pass-through, pay-through, and revolving-period securitizations that meet the conditions in paragraph 860-10-40-5 qualify for sale accounting under this Subtopic, provided the securitization entity is not consolidated by the transferor or its consolidated affiliates in the financial statements being presented.
860-10-55-45
Paragraph 860-10-05-14 provides background on factoring arrangements. Factoring arrangements that meet the conditions in paragraph 860-10-40-5 shall be accounted for as sales of financial assets because the transferor surrenders control over the receivables to the factor.
860-10-55-46
Paragraph 860-10-05-15 provides background on transfers of receivables with recourse. The effect of a recourse provision on the application of paragraph 860-10-40-5 may vary by jurisdiction. In some jurisdictions, transfers with full recourse may not place transferred financial assets beyond the reach of the transferor, its consolidated affiliates (that are not entities designed to make remote the possibility that it would enter bankruptcy or other receivership) included in the financial statements being presented, and its creditors, but transfers with limited recourse may.
- aTransfer consists of an entire financial asset or a group of entire financial assets. Before the method of recourse can be evaluated to determine the appropriate accounting treatment, the entity shall first determine whether a sale has occurred because in some jurisdictions recourse might mean that the transferred financial assets have not been isolated beyond the reach of the transferor, its consolidated affiliates (that are not entities designed to make remote the possibility that it would enter bankruptcy or other receivership) included in the financial statements being presented, and its creditors. A transfer of receivables in their entireties with recourse shall be accounted for as a sale, with the proceeds of the sale reduced by the fair value of the recourse obligation, if the conditions in paragraph 860-10-40-5 are met. Otherwise, a transfer of receivables with recourse shall be accounted for as a secured borrowing.
- bTransfer does not consist of an entire financial asset or a group of entire financial assets. The transferred financial asset must meet the definition of a participating interest.A transfer of a portion of a receivable with recourse, other than that permitted in paragraph 860-10-40-6A(c)(4), does not meet the requirements of a participating interest and shall be accounted for as a secured borrowing.
860-10-55-47
See paragraph 860-20-55-24 for further guidance on accounting for transfers of receivables with recourse.
860-10-55-51
Paragraphs provide background on repurchase agreements. Paragraphs provide background on securities lending transactions. Repurchase agreements and securities lending transactions are required to be evaluated under each of the following conditions for derecognition in accordance with paragraph 860-10-40-5:
- aIsolation. Paragraph 860-10-40-5(a) requires an assessment of whether the transferred financial assets are isolated from the transferor. Paragraphs 860-10-40-5(a) and 860-10-40-8 require that the transferred financial assets be placed beyond the reach of all consolidated affiliates, except for certain bankruptcy-remote entities, included in the financial statements being presented.
- bTransferee's rights to pledge or exchange. Paragraph 860-10-40-5(b) requires an assessment of the transferee's rights to pledge or exchange the transferred financial assets. If a transferor has transferred financial assets to an independent third-party custodian, or to a transferee, under conditions that preclude the transferee from selling or repledging the assets during the term of the repurchase agreement, the transferor has not surrendered control over those assets. In a securities lending transaction, to the extent that the collateral consists of letters of credit or other financial instruments that the holder is not permitted by contract or custom to sell or repledge, the transaction does not satisfy the sale conditions and is accounted for as a loan of securities by the transferor to the transferee.
- cEffective control. Paragraph 860-10-40-5(c) requires an assessment of whether the transferor maintains effective control over transferred financial assets. An agreement that both entitles and obligates the transferor to repurchase transferred financial assets from the transferee in accordance with paragraph 860-10-40-5(c)(1) that meets the criteria in paragraph 860-10-40-24 maintains the transferor's effective control over transferred financial assets. Therefore, transfers with agreements to repurchase transferred financial assets that either meet the effective control criteria or qualify for the repurchase-to-maturity transaction exception need not be assessed under the remaining conditions for derecognition and should be accounted for as a secured borrowing. Paragraph 860-10-55-51A illustrates the application of the effective control condition in paragraph 860-10-40-5(c)(1).
860-10-55-51A
Under certain agreements to repurchase transferred financial assets before their maturity, the transferor maintains effective control over the transferred financial assets. If effective control is maintained or the transaction qualifies for the repurchase-to-maturity transaction exception, the agreement is accounted for as a secured borrowing. If effective control is not maintained or the repurchase-to-maturity transaction exception is not met, the transaction would be assessed under the other derecognition conditions in paragraph 860-10-40-5 to determine if the transferred financial asset should be derecognized and accounted for as a sale.
860-10-55-51B
The following illustrates the application of the derecognition guidance in paragraphs 860-10-40-24 through 40-24A:
- aRepurchase agreements and securities lending transactions—assets that are identical. The following illustrates agreements for which the transferor maintains effective control over the transferred financial asset:
- 1A financial asset is transferred under a contemporaneous agreement with the same counterparty that requires the transferor to repurchase or redeem it before its maturity at a fixed price or at the sale price plus or minus a lender's return.
- 2A financial asset is transferred under a securities lending transaction that requires the transferee to return to the transferor the identical asset before its maturity at a fixed price.
- 1
- bRepurchase agreements and securities lending transactions—assets that are substantially the same. The following illustrates agreements for which the transferor maintains effective control over the transferred financial asset:
- 1A financial asset is transferred under a contemporaneous agreement with the same counterparty to repurchase or redeem an asset that is substantially the same as the initially transferred asset (in accordance with paragraph 860-10-40-24(a)) before its maturity at a fixed price or at the sale price plus or minus a lender's return.
- 2A financial asset is transferred under a securities lending transaction that requires the transferee to return to the transferor an asset that is substantially the same as the initially transferred financial asset (in accordance with paragraph 860-10-40-24(a)) before its maturity at a fixed price.
- 3Fixed-coupon and dollar-roll repurchase agreements, and other contracts under which the securities to be repurchased are substantially the same in accordance with paragraph 860-10-40-24(a) as the securities initially transferred.
- 1
- cRepurchase-to-maturity transactions. A repurchase-to-maturity transaction is accounted for as a secured borrowing as if it maintains the transferor's effective control over the transferred financial asset. A transfer of a financial asset with a contemporaneous total return swap to maturity does not meet the definition of repurchase-to-maturity transaction.
- dCash-settled repurchase agreements. If a financial asset is transferred under a contemporaneous agreement with the same counterparty to repurchase or redeem it before its maturity at a fixed repurchase price or a price equal to the sale price plus or minus a lender's return and the agreement requires the transferee to settle the agreement in cash, the agreement does not maintain the transferor's effective control over the transferred financial assets. An exception is a repurchase-to-maturity transaction as discussed in (c).
860-10-55-54
In repurchase agreements and securities lending transactions involving readily obtainable held-to-maturity debt securities, the conditions set forth in paragraph 860-10-40-24 should be carefully evaluated to determine whether the transaction should be accounted for as a sale or secured borrowing. For example, if the security that is required to be returned has a different maturity or has a different contractual interest rate from the transferred security, the substantially-the-same criterion would not be met. In that circumstance, effective control would not be maintained under the condition in paragraph 860-10-40-5(c) and the transfer would be accounted for as a sale if the other conditions in paragraph 860-10-40-5 are met.
860-10-55-55
If the conditions in paragraph 860-10-40-5 are met, the transferor should account for the repurchase agreement as a sale of financial assets and a forward repurchase commitment, and the transferee should account for the agreement as a purchase of financial assets and a forward resale commitment.
860-10-55-55A
If the conditions in paragraph 860-10-40-5 are met, a securities lending transaction should be accounted for as follows:
- aBy the transferor as a sale of the loaned securities for proceeds consisting of the cash collateral and a forward repurchase commitment. If the collateral in a transaction that meets the conditions in paragraph 860-10-40-5 is a financial asset that the holder is permitted by contract or custom to sell or repledge, that financial asset is proceeds of the sale of the loaned securities.
- bBy the transferee as a purchase of the borrowed securities in exchange for the collateral and a forward resale commitment.
860-10-55-56
Repurchase agreements that involve an exchange of securities or letters of credit are accounted for in the same manner as securities lending transactions (see paragraphs ).
860-10-55-56B
In repurchase agreements and securities lending transactions in which the transferor does not derecognize the transferred financial asset, if the transferee obtains the right to sell or pledge the asset, the transferor reclassifies the asset in its statement of financial position separately from other assets not so encumbered in accordance with paragraph 860-30-45-1.
860-10-55-57
Wash sales shall be accounted for as sales under this Subtopic. Unless there is a concurrent contract to repurchase or redeem the transferred financial assets from the transferee, the transferor does not maintain effective control over the transferred financial assets.
860-10-55-58
Whether paragraph 860-10-40-5(c) precludes sale accounting for a dollar-roll transaction depends on the facts and circumstances. Paragraph 860-10-40-24 states the conditions under which 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). The condition in paragraph 860-10-40-24(a) requires that the financial assets to be repurchased or redeemed are the same or substantially the same as those transferred. Paragraph 860-10-40-24(a) describes six characteristics that must all exist for a transfer to meet the substantially-the-same requirement. Paragraph 860-10-40-24(a)(6) requires (as one of those six characteristics) that the financial asset that was transferred and the financial asset that is to be repurchased or redeemed have the same aggregate unpaid principal amount or principal amounts within accepted good delivery standards for the type of security involved.
860-10-55-59
For transfers of existing securities under a dollar-roll repurchase agreement, the transferee must be committed to return substantially-the-same securities to the transferor, which would indicate that the transferor has maintained effective control. In a transfer of existing securities under a dollar-roll repurchase agreement, if the transferee is committed to return substantially-the-same securities to the transferor but that transferee's securities at the time of the transfer were to-be-announced securities, the transferor would not be precluded from accounting for the transfer as a secured borrowing. The transferor is only required to obtain a commitment from the transferee to return substantially-the-same securities and is not required to determine that the transferee holds the securities that it has committed to return. Therefore, the financial asset to be returned may be a to-be-announced asset at the time of the transfer because the transferor would have no way of knowing whether the transferee held the security to be returned.
860-10-55-60
As illustrated by the following, whether a GNMA roll is accounted for as a secured borrowing or a sale affects the evaluation of the forward contract embedded in the securities subject to the agreement:
- aTypes 1-3 of dollar rolls would qualify for secured borrowing treatment if the redemption of securities on substantially the same terms is assured (see paragraph 860-10-40-24). In that circumstance, the forward contracts embedded in the Types 1-3 securities are outside the scope of Topic 815 because of the scope exception provided in paragraph 815-10-15-63 for derivative instruments that serve as impediments to sale accounting.
- bTypes 2 and 3 securities that involve repurchase of other than substantially-the-same securities are considered sales of securities and forward contracts. The forward contract would need to be evaluated under Subtopic 815-10 because it has terms that would generally meet the definition of a derivative instrument. If the dollar-roll repurchase agreement is accounted for as a sale under this Subtopic, Subtopic 815-10 provides guidance on the subsequent accounting for the forward contract.
860-10-55-61
Paragraph 860-10-05-23 provides background on loan participations. If a loan participation agreement transfers a participating interest in an entire financial asset (as described in paragraph 860-10-40-6A) and the conditions in paragraph 860-10-40-5 are met, the transfers shall be accounted for by the transferor as a sale of a participating interest. However, if the loan participation agreement constrains the transferee from pledging or exchanging its participating interest and that constraint provides a more-than-trivial benefit to the transferor, the transferor has not relinquished control and shall account for the transfer as a secured borrowing.
860-10-55-65
Paragraphs provide background on banker's acceptances and risk participations in them. An accepting bank that obtains a risk participation shall not derecognize the liability for the banker's acceptance, because the accepting bank is still primarily liable to the holder of the banker's acceptance even though it benefits from a guarantee of reimbursement by a participating bank. The accepting bank shall not derecognize the receivable from the customer because it has not transferred the receivable. Rather, it controls the benefits inherent in that receivable and it is still entitled to receive payment from the customer. The accepting bank shall, however, record the guarantee purchased, and the participating bank shall record a liability for the guarantee issued. For an illustration of this guidance, see Example 1 (paragraph 860-10-55-80).
860-10-55-67
If the transferor has the ability to dissolve a securitization entity (for example, through the beneficial interests that it holds) and reassume control of the financial assets at any time, the transferor is precluded from accounting for the transfer as a sale for the following reason:
- a
- bThe transferor's current ability to dissolve the securitization entity and reassume control of the transferred financial assets entitles it to unilaterally cause the return of the transferred financial assets, indicating that the transferor has maintained control over the transferred financial assets which precludes sale accounting under paragraph 860-10-40-5(c).
860-10-55-68
In certain transactions, the transferor is entitled to repurchase a transferred amortizing, individual (specific) financial asset when its remaining principal balance reaches some specified amount, for example, 30 percent of the original balance. To exercise that call option, the transferor would pay the remaining principal balance. Paragraph 860-10-40-5(c)(2) states that a transferor maintains effective control through a call option,other than through a cleanup call, that provides the transferor with both:
- aThe unilateral ability to cause the holder to return specific financial assets
- bA more-than-trivial-benefit attributable to that ability.
860-10-55-68A
Such a call option on the remaining portion of an entire financial asset precludes sale accounting for the entire financial asset. Paragraph 860-10-40-5 applies to an entire financial asset, a group of entire financial assets, or a participating interest. Paragraph 860-10-40-4A states that, to be eligible for sale accounting, an entire financial asset cannot be divided into components before a transfer unless all of the components meet the definition of a participating interest. That paragraph states also that an entity shall not account for a transfer of an entire financial asset or a participating interest in an entire financial asset partially as a sale and partially as a secured borrowing.
860-10-55-70
If a transferor holds a call option to repurchase at any time a few specified, individual loans from an entire group of loans transferred in a securitization transaction, then sale accounting is precluded only for the specified loans subject to the call option, not the whole group of loans. In contrast, if the transferor holds a call option to repurchase from the group any loans it chooses, up to some specified limit, then sale accounting is precluded for the transfer of the entire group while that option remains outstanding. See paragraphs for related guidance.
860-10-55-71
A financial institution involved in commercial lending makes a short-term loan (for example, 90 days) to a borrower under a long-term credit commitment (for example, 5 years). The financial institution transfers the short-term loan, without recourse, to a third-party purchaser for the remaining term of the loan. The risk of loss relating to the short-term loan is legally transferred to the purchaser, and the financial institution has no contractual obligation to repurchase the short-term loan. Under the long-term credit commitment, the financial institution may, at the maturity of the short-term loan, relend to the borrower. However, the financial institution may refuse to relend to the borrower based on a current credit evaluation or if any covenant under the long-term commitment is not satisfied.
860-10-55-72
To the extent that the transfer of the short-term loan made under a long-term credit commitment as described above is accounted for as the transfer of a receivable with a put option, it would be required to be accounted for as a sale if the conditions of paragraph 860-10-40-5 are met. The terms of the put option should be analyzed to determine whether it meets the definition of a derivative instrument under Subtopic 815-10.
860-10-55-73
A financial institution (transferor) transfers to a third-party transferee the right to an amount of future recoveries from loans previously written off by the transferor as uncollectible. The transferee is entitled to recoveries equal to the purchase price plus a market rate of interest on the unrecovered purchase price. There is no recourse to the transferor. The transferee can initiate its own collection efforts if dissatisfied with the transferor's recovery efforts. The transaction is a secured borrowing (that is, a borrowing secured by the transferred rights).
860-10-55-75
An entity may transfer debt securities to an unconsolidated entity that has a predetermined life in exchange for cash and the right to receive proceeds from the eventual sale of the securities. For example, a third party holds a beneficial interest that is initially worth 25 percent of the fair value of the assets of the entity at the date of transfer. The entity is required to sell the transferred securities at a predetermined date and liquidate the entity at that time. Assume the facts in that example and the following additional facts:
- aThe beneficial interests are issued in the form of debt securities.
- bBefore the transfer, the debt securities were accounted for as available-for-sale securities in accordance with Topic 320.
860-10-55-76
In that example, whether the transferor may classify the debt securities as trading at the time of the transfer depends on whether the transfer is accounted for as a sale or as a secured borrowing:
- aSale. If a transfer of a group of entire financial assets satisfies the conditions to be accounted for as a sale, Subtopic 860-20 requires that any assets obtained or liabilities incurred in the transfer be recognized (see paragraph 860-20-25-1) and initially measured at fair value (see paragraph 860-20-30-1). If the transfer in the example is accounted for as a sale, the transferor would account for the debt securities received as new assets and would have the option to classify the debt securities received as trading securities.
- bSecured borrowing. If the transfer is accounted for as a secured borrowing, paragraph 860-30-25-2 requires the transferor to continue to report the transferred debt securities in its statement of financial position with no change in their measurement (that is, basis of accounting). Paragraph 320-10-35-12, which explains that transfers into or from the trading category should be rare, would continue to apply.
860-10-55-77
If the transferred financial assets were not securities subject to the guidance in Topic 320 before the transfer that was accounted for as a sale but the beneficial interests were issued in the form of debt securities, then the transferor would have the opportunity to decide the appropriate classification of the beneficial interests received as proceeds from the sale.
860-10-55-78
A transfer from one subsidiary (the transferor) to another subsidiary (the transferee) of a common parent would be accounted for as a sale in each subsidiary's separate-entity financial statements if both of the following requirements are met:
- aAll of the conditions in paragraph 860-10-40-5 (including the condition on isolation of the transferred financial assets) are met.
- bThe transferee's assets and liabilities are not consolidated into the separate-entity financial statements of the transferor.
860-10-55-79
If the transferee was an equity method investee of the transferor, only the investment and not the investee's assets and liabilities would be reported in the transferor subsidiary's separate-entity financial statements. Therefore, the transferee would not be a consolidated affiliate of the transferor, and such a transfer could isolate the transferred financial assets and be accounted for as a sale if all other conditions of paragraph 860-10-40-5 are met.
860-10-55-79A
This implementation guidance addresses the application of the glossary term continuing involvement. All available evidence shall be considered, including, but not limited to, all of the following:
- aExplicit written arrangements
- bCommunications between the transferor and the transferee or its beneficial interest holders
- cUnwritten arrangements customary in similar transfers.
860-10-55-79B
Examples of continuing involvement include, but are not limited to, all of the following:
- aServicing arrangements
- bRecourse or guarantee arrangements
- cAgreements to purchase or redeem transferred financial assets
- ccOptions written or held
- dDerivative instruments that are entered into contemporaneously with, or in contemplation of, the transfer
- eArrangements to provide financial support
- fPledges of collateral
- gThe transferor's beneficial interests in the transferred financial assets.
Illustrations
860-10-55-80
This Example illustrates the guidance in paragraph 860-10-55-65. This Example has the following assumption.
860-10-55-81
An accepting bank assumes a liability to pay a customer's vendor and obtains a risk participation from another bank. The details of the banker's acceptance are as follows:
- aFace value of the draft provided to the vendor: $1,000
- bTerm of the draft provided to the vendor: 90 days
- cCommission with an annual rate of 10 percent: 25
- dFee paid for risk participation: 10.
860-10-55-82
The accepting bank would make the following journal entries.
Journal Entries for Accepting Bank At issuance of acceptance: Receivable from customer " $1,000 " Cash 25 Time draft payable to vendor " $1,000 " Deferred acceptance commission revenue 25 At purchase of risk participation from a participating bank: Guarantee purchased 10 Cash 10 Upon presentation of the accepted time draft: Time draft payable to vendor " 1,000 " Deferred acceptance commission revenue 25 Cash " 1,000 " Acceptance commission revenue 25 "Upon collection from the customer (or the participating bank, if the customer defaults):" Cash " 1,000 " Guarantee expense 10 Receivable from customer " 1,000 " Guarantee purchased 10
Journal Entries for Participating Bank Upon issuing the risk participation: Cash $10 Guarantee liability $10 Upon payment by the customer to the accepting bank: Guarantee liability 10 Guarantee revenue 10 OR: In the event of total default by the customer: Guarantee loss 990 Guarantee liability 10 Cash (paid to accepting bank) " 1,000 "
860-10-60Relationships
Source downloaded: .Record version eb35e473abc3. Effective date must be checked in the source.
Consolidation
860-10-60-1
For the requirements for preparation of consolidated financial statements, see the General Subsections of Subtopic 810-10.
860-10-60-2
For guidance on consolidation of variable interest entities (VIEs), see the Variable Interest Entities Subsections of Subtopic 810-10, which clarify the application of the General Subsections of that Subtopic to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.
860-10-65Transition and Open Effective Date Information
Source downloaded: .Record version 23dfbe5ca754. Effective date must be checked in the source.
860-10-65-1
Paragraph superseded on 05/20/2010 after the end of the transition period stated in FASB Staff Position FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.
860-10-65-2
Paragraph superseded on 03/23/2010 after the end of the transition period stated in FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.
860-10-65-3
Paragraph superseded on 05/18/2011 after the end of the transition period stated in FASB Statement No. 166, Accounting for Transfers of Financial Assets.
860-10-65-4
Paragraph superseded on 06/17/2013 after the end of the transition period stated in Accounting Standards Update No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements.
860-10-65-5
Paragraph superseded on 07/05/2017 after the end of the transition period stated in Accounting Standards Update No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.
860-10-S40DerecognitionSEC
Source downloaded: .Record version 0c791085e34a. Effective date must be checked in the source.
Sale of Mortgage Servicing Rights with a Subservicing Agreement
860-10-S40-1
See paragraph 860-10-S99-1, SEC Observer Comment: Treatment of a Sale of Mortgage Servicing Rights with a Subservicing Agreement, for SEC Staff views on such transactions.
Transfer of Certain Nonperforming Assets by Distribution to Shareholders or a Contribution of Assets to Unrelated Third Parties
860-10-S40-2
See paragraph 942-810-S99-1, SAB Topic 5.V, for SEC Staff views on accounting and disclosure for certain transfers of financial assets that do not fall within the scope of Topic 860.
860-10-S50DisclosureSEC
Source downloaded: .Record version 2156bfdc1dc5. Effective date must be checked in the source.
Repurchase and Reverse Repurchase Agreements
860-10-S50-1
See paragraph 235-10-S99-1, Regulation S-X Rule 4-08(m), for disclosure requirements for repurchase and reverse repurchase agreements.
860-10-S99SEC MaterialsSEC
Source downloaded: .Record version 369e4f3f261e. Effective date must be checked in the source.
SEC Staff Guidance
860-10-S99-1
The following is the text of SEC Observer Comment: Balance Sheet Treatment of a Sale of Mortgage Servicing Rights with a Subservicing Agreement.
- In accordance with paragraph 860-50-40-7, a sale of mortgage servicing rights with a subservicing contract could be treated as a sale with the gain deferred if substantially all of the risks and rewards have been transferred to the transferree. In the view of the SEC staff, a transaction that, in substance, transfers only a portion of the servicing revenues does not result in transfer of substantially all of the risks and rewards of ownership and the accounting for those transactions should be guided by the guidance in paragraph 470-10-25-1.
Related subtopics
- 860-20 Sales of Financial AssetsTransfers and Servicing
- 860-50 Servicing Assets and LiabilitiesTransfers and Servicing
- 860-30 Secured Borrowing and CollateralTransfers and Servicing
- 470-50 Modifications and ExtinguishmentsDebt
- 810-942 Financial Services—Depository and LendingConsolidation
- 480-10 OverallDistinguishing Liabilities from Equity