# ASC 860-20-55: Transfers and Servicing — Sales of Financial Assets — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

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## ASC 860-20-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/860/20/#55-implementation-guidance-and-illustrations)

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#### Implementation Guidance

##### [860-20-55-1](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-1)

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The following is implementation guidance related to the guidance in this Subtopic, specifically:

1.  a
    
    [Subparagraph superseded by Accounting Standards Update No. 2009-16](https://asc.understandingaccounting.org/updates/asu-2009-16/).
    
2.  b
    
    Estimating the fair value of certain beneficial interests
    
3.  c
    
    Accrued interest receivable
    
4.  d
    
    Options embedded in transferred securities
    
5.  e
    
    Credit risk associated with transferred assets
    
6.  f
    
    [Transfer](https://asc.understandingaccounting.org/glossary/t/#transfer "The conveyance of a noncash financial asset by and to someone other than the issuer of that financial asset. A transfer includes the following: Selling a receivable Putting a receivable into a securitization trust Posting a receivable as collateral. A transfer excludes the following: The origination of a receivable Settlement of a receivable The restructuring of a receivable into a security in a troubled debt restructuring.") of a bond purchased at a premium
    
7.  g
    
    Sales or [securitizations](https://asc.understandingaccounting.org/glossary/s/#securitization "The process by which financial assets are transformed into securities.") of lease receivables
    
8.  h
    
    [Subparagraph superseded by Accounting Standards Update No. 2009-16](https://asc.understandingaccounting.org/updates/asu-2009-16/).
    
9.  i
    
    Forward contracts in [revolving-period securitizations](https://asc.understandingaccounting.org/glossary/r/#revolving-period-securitizations "Securitizations in which receivables are transferred at the inception and also periodically (daily or monthly) thereafter for a defined period (commonly three to eight years), referred to as the revolving period. During the revolving period, the special-purpose entity uses most of the cash collections to purchase additional receivables from the transferor on prearranged terms.")
    
10.  j
     
     Subsequent measurement of interests issued in securitization transactions
     
11.  k
     
     [Transferor](https://asc.understandingaccounting.org/glossary/t/#transferor "An entity that transfers a financial asset, an interest in a financial asset, or a group of financial assets that it controls to another entity.") regains control of assets through a removal-of-accounts provision.

##### [860-20-55-2](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-2)

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[Paragraphs 860-20-55-2 through 55-15 superseded by Accounting Standards Update No. 2009-16](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-2).

##### [860-20-55-16](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-16)

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Trust liquidation methods that allocate receipts of principal or interest between beneficial interest holders and transferors in proportions different from their stated percentage of ownership interests do not affect whether the transferor should obtain sale accounting and [derecognize](https://asc.understandingaccounting.org/glossary/d/#derecognize "Remove previously recognized assets or liabilities from the statement of financial position.") those transferred assets, assuming the trust is not required to be consolidated by the transferor. However, both turbo and bullet provisions in securitization structures (as discussed in paragraph [860-10-05-3](https://asc.understandingaccounting.org/asc/860/10/#860-10-05-3)) should be taken into consideration in determining the fair values of assets obtained by the transferor and transferee.

##### [860-20-55-17](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-17)

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The receivables for accrued fee and finance charge income on an investors' portion of the transferred credit card receivables, whether billed but uncollected or accrued but unbilled, are commonly referred to as accrued interest receivable. The following addresses how the accrued interest receivable related to securitized and sold receivables should be accounted for and reported under this Subtopic. This guidance applies to credit card securitizations as well as other kinds of securitizations.

##### [860-20-55-18](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-18)

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The right to receive the accrued interest receivable, if and when collected, is transferred to the securitization trust. Generally, if a securitization transaction meets the criteria for sale treatment and the accrued interest receivable is subordinated either because the asset has been isolated from the transferor (see paragraph [860-10-40-5](https://asc.understandingaccounting.org/asc/860/10/#860-10-40-5)) or because of the operation of the cash flow distribution (or waterfall) through the securitization trust, the total accrued interest receivable should be considered to be one of the components of the sale transaction. Therefore, under the circumstances described, the accrued interest receivable asset should be accounted for as a transferor's interest.It is inappropriate to report the accrued interest receivable related to securitized and sold receivables as loans receivable or other terminology implying that it has not been subordinated to the senior interests in the securitization.

##### [860-20-55-19](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-19)

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While, under the circumstances described, the accrued interest receivable is a transferor's interest, it is not required to be subsequently measured like an investment in debt securities classified as available for sale or trading under Topic 320 or the Transfers and Servicing Topic because the accrued interest receivable cannot be contractually prepaid or settled in such a way that the owner would not recover substantially all of its recorded investment. Entities should follow existing applicable accounting standards, including Topic 326 on measurement of credit losses, in subsequent accounting for the accrued interest receivable asset.

##### [860-20-55-20](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-20)

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This guidance addresses transactions that involve the sale of a marketable security to a third-party buyer, with the buyer's having an option to put the security back to the seller at a specified future date or dates for a fixed price. Because of the put option, the seller generally receives a premium price for the security.

##### [860-20-55-21](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-21)

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If the transfer is accounted for as a sale, a put option that enables the holder to require the writer of the option to reacquire for cash or other assets a marketable security or an equity instrument issued by a third party should be accounted for as a derivative by both the holder and the writer, provided the put option meets the definition of a derivative in paragraph [815-10-15-83](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) (including meeting the net settlement requirement, which may be met if the option can be net settled in cash or other assets or if the asset required to be delivered is readily convertible to cash). If multiple put options exist, recognition of the multiple put options as liabilities, and initial measurement at fair value, are required.

##### [860-20-55-22](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-22)

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A put option that is issued as part of a transfer being accounted for as a sale that is not accounted for as a derivative under Subtopic 815-10 would be considered a guarantee under paragraph [460-10-55-2(b)](https://asc.understandingaccounting.org/asc/460/10/#460-10-55-2) and would be subject to its initial recognition, initial measurement, and disclosure requirements. If the written put option is accounted for as a derivative under Subtopic 815-10 by the seller-transferor, then the put option would be subject to only the disclosure requirements of Topic 460.

##### [860-20-55-23](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-23)

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If the transaction is accounted for as a secured borrowing under Subtopic 860-30, any difference between the sale proceeds and the put price shall be accrued as interest expense, and any impairment of the underlying security would generally not be recognized. The difference between the original sale price and the put price should be amortized over the period to the first date the securities are eligible to be put back. If the transfer is accounted for as a secured borrowing, the put option falls under paragraph [815-10-15-63](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-63), which provides a scope exception for a derivative instrument (such as the put option) that serves as an impediment to sale accounting under Subtopic 860-10. The guidance in paragraph [815-10-55-41](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-41) may also be relevant.

##### [860-20-55-24](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-24)

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A transferor may hold some portion of the credit risk associated with a transfer of an entire [financial asset](https://asc.understandingaccounting.org/glossary/f/#financial-asset "Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following: Receive cash or another financial instrument from a second entity Exchange other financial instruments on potentially favorable terms with the second entity.") or group of entire financial assets. For example, a transferor may incur a liability to reimburse the [transferee](https://asc.understandingaccounting.org/glossary/t/#transferee "An entity that receives a financial asset, an interest in a financial asset, or a group of financial assets from a transferor."), up to a certain limit, for a failure of debtors to pay when due (a recourse liability). In that circumstance, a liability should be separately recognized and initially measured at fair value. That liability should be subsequently measured according to guidance in other Topics for measuring similar liabilities. In other circumstances, a transferor may provide credit enhancement through its ownership of a beneficial interest in the [transferred financial assets](https://asc.understandingaccounting.org/glossary/t/#transferred-financial-assets "Transfers of any of the following: An entire financial asset A group of entire financial assets A participating interest in an entire financial asset.") if that beneficial interest is not paid until the other investors in the transferred financial assets are paid, thereby resulting in the transferor absorbing much of the related credit risk. As a result, the beneficial interests that are obtained by the transferor should be initially recognized according to paragraph [860-20-25-1](https://asc.understandingaccounting.org/asc/860/20/#860-20-25-1).

##### [860-20-55-24A](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-24A)

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If the transfer does not consist of an entire financial asset or group of entire financial assets, the transferred financial asset must meet the definition of a [participating interest](https://asc.understandingaccounting.org/glossary/p/#participating-interest "Paragraph 860-10-40-6A defines the term participating interest."). Paragraph [860-10-40-6A(c)(4)](https://asc.understandingaccounting.org/asc/860/10/#860-10-40-6A) states that, to meet that definition, participating interest holders shall have no recourse to the transferor (or its [consolidated affiliates](https://asc.understandingaccounting.org/glossary/c/#consolidated-affiliate "An entity whose assets and liabilities are included in the consolidated, combined, or other financial statements being presented.") included in the financial statements being presented or its [agents](https://asc.understandingaccounting.org/glossary/a/#agent "A party that acts for and on behalf of another party. For example, a third-party intermediary is an agent of the transferor if it acts on behalf of the transferor.")) or to each other, other than any of the following:

1.  a
    
    Standard representations and warranties
    
2.  b
    
    Ongoing contractual obligations to service the entire financial asset and administer the transfer contract
    
3.  c
    
    Contractual obligations to share in any set-off benefits received by any participating interest holder.
    

That recourse would result in the transfer being accounted for as a secured borrowing under Subtopic 860-30.

##### [860-20-55-25](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-25)

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Assume an entity transfers a bond to an unconsolidated entity for cash and beneficial interests. When the transferor purchased the bond, it paid a premium for it (or bought it at a discount), and that premium (or discount) was not fully amortized (or accreted) at the date of the transfer. In other words, the carrying amount of the bond included a premium (or discount) at the date of the transfer. If the transfer of the bond is accounted for as a secured borrowing under Subtopic 860-30, the transferor would continue to amortize (or accrete) the premium (or discount) because paragraph [860-30-25-2](https://asc.understandingaccounting.org/asc/860/30/#860-30-25-2) requires that the transferor continue to report the transferred financial assets in its statement of financial position with no change in their measurement (that is, basis of accounting). If the transfer of the bond satisfies the conditions to be accounted for as a sale, any beneficial interests received as proceeds would be initially recognized at fair value. As a result, the previously existing premium (or discount) would not continue to be amortized (or accreted); rather, the unamortized (or nonaccreted) amount would be included in the calculation of the gain (or loss) as of the transfer date.

##### [860-20-55-26](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-26)

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A transferor of lease receivables shall allocate the gross investment in receivables between [lease payments](https://asc.understandingaccounting.org/glossary/l/#lease-payments "See paragraph 842-10-30-5 for what constitutes lease payments from the perspective of a lessee and a lessor."), residual values guaranteed at commencement, and residual values not guaranteed at commencement using the individual carrying amounts of those components at the date of transfer. Those transferors also shall record a servicing asset or liability in accordance with Subtopic 860-50, if appropriate.

##### [860-20-55-27](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-27)

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See paragraph [860-10-55-6](https://asc.understandingaccounting.org/asc/860/10/#860-10-55-6) for further discussion of lease receivables.

##### [860-20-55-28](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-28)

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[Paragraph superseded by Accounting Standards Update No. 2009-16](https://asc.understandingaccounting.org/updates/asu-2009-16/).

##### [860-20-55-29](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-29)

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The requirement that all financial assets obtained and liabilities incurred by the transferor of a securitization that qualifies as a sale shall be recognized and measured as provided in this Subtopic includes the implicit forward contract to sell additional financial assets during a revolving period. Such a forward contract may become valuable or onerous to the transferor as interest rates and other market conditions change.

##### [860-20-55-30](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-30)

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The value of the forward contract implicit in a revolving-period securitization arises from the difference between the agreed-upon rate of return to investors on their beneficial interests in the trust and current market rates of return on similar investments. For example, if the agreed-upon annual rate of return to investors in a trust is 6 percent, and later market rates of return for those investments increased to 7 percent, the forward contract's value to the transferor (and burden to the investors) would approximate the present value of 1 percent of the amount of the investment for each year remaining in the revolving structure after the receivables already transferred have been collected. If a forward contract to sell receivables is entered into at the market rate, its value at inception may be zero. Changes in the fair value of the forward contract are likely to be greater if the investors receive a fixed rate than if the investors receive a rate that varies based on changes in market rates.

##### [860-20-55-31](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-31)

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Gain or loss recognition for revolving-period receivables sold to a securitization trust is limited to receivables that exist and have been sold.

##### [860-20-55-32](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-32)

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The following is implementation guidance related to the subsequent measurement of various types of financial assets subject to prepayment, specifically:

1.  a
    
    Instruments that can be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the recorded investment
    
2.  b
    
    Loan that can be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the recorded investment at initial acquisition
    
3.  c
    
    Classification of a residual tranche in a securitization as held to maturity.

##### [860-20-55-33](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-33)

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The following discusses whether the following types of instruments are subject to the subsequent measurement guidance in paragraph [860-20-35-2](https://asc.understandingaccounting.org/asc/860/20/#860-20-35-2):

1.  a
    
    A [financial asset](https://asc.understandingaccounting.org/glossary/f/#financial-asset "Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following: Receive cash or another financial instrument from a second entity Exchange other financial instruments on potentially favorable terms with the second entity.") that is not a debt security denominated in a foreign currency
    
2.  b
    
    A note for which the repayment amount is indexed to the creditworthiness of a party other than the issuer.

##### [860-20-55-34](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-34)

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Investing in a financial asset that is denominated in a foreign currency often exposes an entity to foreign currency exchange rate risk; however, that risk is not addressed in paragraph [860-20-35-2](https://asc.understandingaccounting.org/asc/860/20/#860-20-35-2).

##### [860-20-55-35](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-35)

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A financial asset that is not a debt security under Topic 320 is not subject to the requirements of paragraph [860-20-35-2](https://asc.understandingaccounting.org/asc/860/20/#860-20-35-2) because it is denominated in a foreign currency.

##### [860-20-55-36](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-36)

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An entity is not required to measure such an investment like a debt security under paragraph [860-20-35-2](https://asc.understandingaccounting.org/asc/860/20/#860-20-35-2) unless it has provisions that allow it to be contractually prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment, as denominated in the foreign currency. For example, an investment denominated in deutsche marks by an entity with a U.S. dollar functional currency would not be subject to that paragraph if the contract requires that substantially all of the invested deutsche marks be repaid.

##### [860-20-55-37](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-37)

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A note for which the repayment amount is indexed to the creditworthiness of a party other than the issuer is subject to the provisions of paragraph [860-20-35-2](https://asc.understandingaccounting.org/asc/860/20/#860-20-35-2) because the event that might cause the holder to receive less than substantially all of its recorded investment is based on a contractual provision, not on a default by the borrower (that is, the issuer of the note). That contractual provision indexes the payment terms of the note to a default by a third party unrelated to the issuer of the note. If that note is within the scope of Subtopic 815-10 the guidance of paragraph [860-20-35-2](https://asc.understandingaccounting.org/asc/860/20/#860-20-35-2) would not apply.

##### [860-20-55-38](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-38)

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A loan (that is not a debt security) that when initially obtained could be contractually prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment may be reclassified as held for investment later in its life (that is, at a date that is so close to the financial asset's maturity that the holder would recover substantially all of its recorded investment even if it was prepaid). That is, the loan would no longer be required to be measured in accordance with the guidance in paragraph [860-20-35-2](https://asc.understandingaccounting.org/asc/860/20/#860-20-35-2)if both of the following conditions are met:

1.  a
    
    It would no longer be possible for the holder not to recover substantially all of its recorded investment upon contractual prepayment or settlement.
    
2.  b
    
    The conditions for amortized cost accounting are met (for example, paragraphs [310-10-35-47](https://asc.understandingaccounting.org/asc/310/10/#310-10-35-47) and [948-310-25-1](https://asc.understandingaccounting.org/asc/310/948/#310-948-25-1)).
    

However, any unrealized holding gain or loss arising under the available-for-sale classification that exists at the date of the reclassification would continue to be reported in other comprehensive income but should be amortized over the remaining life of the loan as an adjustment of yield. (The loan would not be classified as held to maturity because under Topic 320 only debt securities may be classified as held to maturity.)

##### [860-20-55-39](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-39)

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Whether a residual tranche debt security in a securitization of financial assets (for example, receivables) using a securitization entity can be classified as held to maturity depends on the facts and circumstances. If the contractual provisions of the residual tranche debt security provide that the residual tranche can contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment, paragraph [860-20-35-2](https://asc.understandingaccounting.org/asc/860/20/#860-20-35-2) precludes the residual tranche debt security from being accounted for as held to maturity. In contrast, if the only way that the holder of the residual tranche would not recover substantially all of its recorded investment would be in response to a default by the borrower (debtor), then a held-to-maturity classification is acceptable if the conditions specified for a held-to-maturity classification in paragraphs [320-10-25-1(c)](https://asc.understandingaccounting.org/asc/320/10/#320-10-25-1) and [320-10-25-5(a)](https://asc.understandingaccounting.org/asc/320/10/#320-10-25-5) have been met.

##### [860-20-55-40](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-40)

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This guidance addresses implementation of paragraph [860-20-25-11](https://asc.understandingaccounting.org/asc/860/20/#860-20-25-11). Under that paragraph's guidance, if the removal-of-accounts provision is not exercised, the financial assets are recognized because the transferor now can unilaterally cause the transferee to return those specific financial assets and, therefore, the transferor once again has effective control over those transferred financial assets (see paragraphs

[860-20-25-8 through 25-10](https://asc.understandingaccounting.org/asc/860/20/#860-20-25-8)

).

##### [860-20-55-41](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-41)

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Similarly, when a contingency related to a transferor's contingent right has been met, the transferor generally must account for the repurchase of a specific subset of the financial assets transferred to and held by the entity. When the contingency has been met, the transferor has a unilateral right to purchase a specific transferred financial asset. At that point, the transferor must determine whether the unilateral right to purchase a specific transferred financial asset provides the transferor with a more-than-trivial benefit. If the unilateral right to purchase a specific transferred financial asset provides the transferor with a more-than-trivial benefit, the transfer fails the criterion in paragraph [860-10-40-5(c)(2)](https://asc.understandingaccounting.org/asc/860/10/#860-10-40-5). The transferor must perform this analysis regardless of whether it intends to exercise its call option.

##### [860-20-55-42](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-42)

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Although this guidance uses removal-of-accounts provisions as an example, the guidance is not limited to removal-of-accounts provisions. Contingent rights can arise in many other situations. See paragraphs

[860-10-55-39 through 55-42](https://asc.understandingaccounting.org/asc/860/10/#860-10-55-39)

for more information.

#### Illustrations

##### [860-20-55-43](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-43)

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This Example illustrates the guidance in paragraphs [860-20-25-1](https://asc.understandingaccounting.org/asc/860/20/#860-20-25-1) and [860-20-30-1](https://asc.understandingaccounting.org/asc/860/20/#860-20-30-1). Entity A transfers entire loans with a carrying amount of $1,000 to an unconsolidated securitization entity and receives proceeds with a fair value of $1,030, and the transfer is accounted for as a sale. Entity A undertakes no obligation to service and assumes a limited recourse obligation to repurchase delinquent loans. Entity A agrees to provide the transferee a return at a variable rate of interest even though the contractual terms of the loan are fixed rate in nature (that provision is effectively an interest rate swap).

##### [860-20-55-44](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-44)

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This Example has the following assumptions.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-303D7D6C-1FF0-4687-A95F-7AB67EA5ABE2-low.gif)
    
    Fair Values Cash proceeds " $1,050 " Interest rate swap asset 40 Recourse obligation 60 Net Proceeds Cash received " $1,050 " Plus: Interest rate swap asset 40 Less: Recourse obligation (60) Net proceeds " $1,030 " Gain on Sale Net proceeds " $1,030 " Less: Carrying amount of loans sold " (1,000)" Gain on sale $30

##### [860-20-55-45](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-45)

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The following journal entry is made by Entity A.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-5E5C4FFE-2512-462B-804B-0D750D74D2EF-low.gif)
    
    Journal Entry Cash " $1,050 " Interest rate swap asset 40 Loans " $1,000 " Recourse obligation 60 Gain on sale 30 To record transfer

##### [860-20-55-46](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-46)

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This Example illustrates the guidance in paragraph [860-20-25-1](https://asc.understandingaccounting.org/asc/860/20/#860-20-25-1). This Example assumes the conditions for a sale in paragraph [860-10-40-5](https://asc.understandingaccounting.org/asc/860/10/#860-10-40-5) are met. Entity B transfers a nine-tenths participating interest in a loan with a fair value of $1,100 and a carrying amount of $1,000, and the transfer is accounted for as a sale. The servicing contract has a fair value of zero because Entity B estimates that the benefits of servicing are just adequate to compensate it for its servicing responsibilities.

##### [860-20-55-47](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-47)

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This Example has the following assumptions.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-5DE2DCDA-CE45-48B8-A48C-267EB6A60E22-low.gif)
    
    Fair Values "Cash proceeds for nine-tenths participating interest sold ($1,100 x 9/10) " $990 "One-tenth participating interest that continues to be held by the transferor ($1,100 x 1/10) " 110
    
-   ![](https://asc.understandingaccounting.org/asc-img/GUID-D72C8C1B-E90B-4CD2-AAB5-62933372D724-low.gif)
    
    Allocated Carrying Amount Based on Relative Fair Values Fair Value Percentage of Total Fair Value Allocated Carrying Amount Nine-tenths participating interest sold $990 90 $900 One-tenth participating interest that continues to be held by the transferor 110 10 100 Total $1,100 100 $1,000
    
-   ![](https://asc.understandingaccounting.org/asc-img/GUID-CE8E7541-34B8-4F4A-A0F3-4CF5F12B43CF-low.gif)
    
    Gain on Sale Net proceeds $990 Less: Carrying amount of loans sold (900) Gain on sale $90

##### [860-20-55-48](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-48)

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The following journal entry is made by Entity B.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-9C1EBA41-258D-4725-B617-FB414FC5F0BD-low.gif)
    
    Journal Entry Cash $990 Loans $900 Gain on sale 90 To record transfer

##### [860-20-55-49](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-49)

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[Paragraphs 860-20-55-49 through 55-57 superseded by Accounting Standards Update No. 2009-16](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-49).

##### [860-20-55-58](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-58)

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[860-20-25-1](https://asc.understandingaccounting.org/asc/860/20/#860-20-25-1)At the beginning of the second year in a 10-year sales-type lease, Entity E transfers for $505 a nine-tenths participating interest in the lease receivable to an independent third party, and the transfer is accounted for as a sale. Entity E retains a one-tenth participating interest in the lease receivable and a 100 percent interest in the unguaranteed residual asset, which is not subject to the requirements of this Subtopic as discussed in paragraph [860-10-55-6](https://asc.understandingaccounting.org/asc/860/10/#860-10-55-6) because it is not a financial asset and, therefore, is excluded from the analysis of whether the transfer of the nine-tenths participating interest in the lease receivable meets the definition of a participating interest. The servicing asset has a fair value of zero because Entity E estimates that the benefits of servicing are just adequate to compensate it for its servicing responsibilities. The carrying amounts and related gain computation are as follows.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-FB58F22A-04AB-412A-A671-C72142061BEA-low.gif)
    
    Carrying Amounts Lease receivable $540 Unearned income related to lease receivable 370 Gross investment in lease receivable 910 Unguaranteed residual asset $30 Unearned income related to unguaranteed residual asset 60 Gross investment in unguaranteed residual asset 90 Total gross investment in lease receivable " $1,000 " Gain on Sale Cash received $505 Nine-tenths of carrying amount of gross investment in lease receivable $819 Nine-tenths of carrying amount of unearned income related to lease receivable 333 Net carrying amount of lease receivable sold 486 Gain on sale $19

##### [860-20-55-59](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-59)

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The following journal entry is made by Entity E.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-FF66109F-F224-46F2-92D2-9C62F4FB3BDC-low.gif)
    
    Journal Entry Cash $505 Unearned income 333 Lease receivable $819 Gain on sale 19 To record sale of nine-tenths of the lease receivable at the beginning of Year 2

##### [860-20-55-60](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-60)

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[Paragraphs 860-20-55-60 through 55-82 superseded by Accounting Standards Update No. 2009-16](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-60).

##### [860-20-55-83](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-83)

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This Example illustrates the accounting for a sale of loans in their entirety by a transferor to an unconsolidated entity and the subsequent accounting for the transferor's interest and a servicing asset. In this Example, the transferor's interest is an [interest-only strip](https://asc.understandingaccounting.org/glossary/i/#interest-only-strip "A contractual right to receive some or all of the interest due on a bond, mortgage loan, collateralized mortgage obligation, or other interest-bearing financial asset.") that is accounted for at fair value in the same manner as an available-for-sale security under paragraph [860-20-35-2](https://asc.understandingaccounting.org/asc/860/20/#860-20-35-2).

##### [860-20-55-84](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-84)

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This Example has the following assumptions.

##### [860-20-55-85](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-85)

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On January 2, 20X1, Entity I (the transferor) originates $1,000 of loans, yielding 10.5 percent interest income for their estimated life of 9 years. Entity I later transfers the loans in their entirety to an unconsolidated entity and accounts for the transfer as a sale. Entity I receives as proceeds $1,000 cash plus a beneficial interest that entitles it to receive 1 percent of the contractual interest (an interest-only strip receivable). Entity I will continue to service the loans for a fee of 100 basis points. The guarantor, a third party, receives 50 basis points as a guarantee fee.

##### [860-20-55-86](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-86)

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At the date of transfer, the following facts are assumed.

1.  a
    
    The fair value of the servicing asset is $40.
    
2.  b
    
    The total fair value of the loans including servicing is $1,040.
    
3.  c
    
    The fair value of the interest-income strip receivable is $60.

##### [860-20-55-87](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-87)

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On December 1, 20X1, an event occurs that results in the transfer not meeting the conditions for sale accounting. The fair value of the originally transferred financial assets that remain outstanding in the entity on that date is $929. The fair value of Entity I's interest (in the form of an interest-only strip) on that date is $58. The fair value of the servicing asset on that date is $38. The guarantee that was entered into by the entity does not trade with the underlying financial assets. The fees on this guarantee will be paid as part of the cash waterfall.

##### [860-20-55-88](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-88)

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All cash flows from the financial assets transferred to the trust are initially sent directly to the trust and then distributed in order of priority. The priority of payments in the cash waterfall is as follows: servicing fees, guarantees, amounts due to outside beneficial interest holders, and amounts due to Transferor's beneficial interest.

##### [860-20-55-89](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-89)

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[Paragraph superseded by Accounting Standards Update No. 2009-16](https://asc.understandingaccounting.org/updates/asu-2009-16/).

##### [860-20-55-90](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-90)

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The following journal entries would be made.

-   January 2, 20X1
    
-   ![](https://asc.understandingaccounting.org/asc-img/GUID-9704F8AD-DE2B-407C-B6F0-F6AE0A3F1B9D-low.gif)
    
    Cash $1000 Transferor's interest (available for sale) 60 Servicing asset 40 Loans $1000 Gain on sale 100 To record the sale of the assets and to recognize Entity I's interest and a servicing asset at fair value.
    
-   December 1, 20X1
    
-   ![](https://asc.understandingaccounting.org/asc-img/GUID-283BCED7-C67C-4DA4-A1BC-9507C3B8B0A3-low.gif)
    
    Other comprehensive income $2 Entity I's interest (available for sale) $2 To subsequently measure Entity I's interest in the same manner as an available-for-sale security.

##### [860-20-55-91](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-91)

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The following illustrates the accounting entry to be made after the event occurs that results in the transfer not meeting the conditions for sale accounting.

-   December 1, 20X1
    
-   ![](https://asc.understandingaccounting.org/asc-img/GUID-F9E2AD18-1682-44E0-A2F8-D699AB17ADF2-low.gif)
    
    Loans $929 Due to Securitization Entity $929 To recognize the previously sold loans on Entity I's books along with the obligation to pass the cash flows associated with those loans to Securitization Entity.

##### [860-20-55-92](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-92)

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Entity I would account for the rerecognized financial assets and transferor's interests as follows:

1.  a
    
    Entity I would continue to account for transferor's interests (in accordance with paragraph [320-10-35-1](https://asc.understandingaccounting.org/asc/320/10/#320-10-35-1)) at fair value with changes in fair value recognized in other comprehensive income.
    
2.  b
    
    Entity I would account for the loans at cost plus accrued interest in accordance with Subtopic 310-20.

##### [860-20-55-93](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-93)

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[Paragraphs 860-20-55-93 through 55-107 superseded by Accounting Standards Update No. 2009-16](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-93).

##### [860-20-55-108](https://asc.understandingaccounting.org/asc/860/20/#860-20-55-108)

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This Example illustrates one approach for satisfying the quantitative disclosure requirements in paragraph [860-20-50-4D](https://asc.understandingaccounting.org/asc/860/20/#860-20-50-4D).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-C2B8A55A-CAA2-4A63-B4D9-413313C75D08-low.gif)
    
    "Transfers of Financial Assets Accounted for as Sales (Dollars in millions)" At the Date of Derecognition for Transactions Outstanding At the Reporting Date " Type of Transaction" Carrying Amount Derecognized Gross Cash Proceeds Received for Assets Derecognized Fair Value of Transferred Assets Gross Derivative Assets Recorded (a) (b) Gross Derivative Liabilities Recorded (a) (b) Repurchase agreements $ XX $ XX $ XX $ XX $ XX Repo financings xx xx xx xx xx Sale and a total return swap XX XX XX XX XX Securities lending XX XX XX XX XX Total $ XX $ XX $ XX $ XX $ XX (a) "Balances are presented on a gross basis, before the application of counterparty and cash collateral offsetting." (b) "$XX of gross derivative assets and $XX of gross derivative liabilities are included as interest rate contracts in footnote X on derivative disclosures. $XX of gross derivative assets and $XX of gross derivative liabilities are included as credit risk contracts in footnote X on derivative disclosures. "