This Section sets forth the conditions for derecognition of a
transferred financial asset and is organized as follows:
- a
- b
- c
Application of the sale criteria to instruments that have the potential to be assets or liabilities
- d
Circumstances that result in a
transferor regaining control of assets previously sold
- e
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:
- a
Isolation 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. - b
Transferee's rights to pledge or exchange. This condition is met if both of the following conditions are met:
- 1
Each 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. - 2
No condition does both of the following:
- i
Constrains the transferee (or third-party holder of its beneficial interests) from taking advantage of its right to pledge or exchange
- ii
Provides 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.
- c
Effective 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: - 1
An agreement that both entitles and obligates the transferor to repurchase or redeem the transferred financial assets before their maturity (see paragraphs ) - 2
An agreement, other than through a cleanup call (see paragraphs ), that provides the transferor with both of the following: - i
- ii
A more-than-trivial benefit attributable to that ability.
- 3
An 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).
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.
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.
- 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.
- 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.
- 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.
A set-off right is not an impediment to meeting the participating interest definition. For implementation guidance on the application of the term
participating interest, see paragraphs
.
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.
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.
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. 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.
All of the following are examples of conditions that both constrain the transferee and presumptively provide the transferor with more than trivial benefits:
- a
A 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.
- b
Transferor-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.
- c
Some rights or obligations to reacquire transferred financial assets or beneficial interests, including all of the following:
- 1
A 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. - 1a
A 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.
- 2
A 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.
- 3
A 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
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.
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.
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.
This guidance addresses whether any of the following agreements maintain effective control under paragraph
860-10-40-5(c)(2):
- a
A 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. - b
A 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. - c
A call option on readily obtainable assets at fair value may not provide the transferor with more than a trivial benefit.
Paragraph 860-10-40-35 provides an example in which, due to the combination of arrangements, the transferor would maintain effective control. 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.
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.
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.
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.
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.
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.
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.