This Section provides guidance on the recognition of
transfers of financial assets as secured borrowings with a pledge of
collateral. It addresses the following areas:
- a
Cash collateral
- b
Noncash collateral
- c
Cash or securities received as proceeds
- d
Sales of collateral received.
Transfers of financial assets in exchange for cash collateral cannot be distinguished from borrowing cash. Further, because cash is fungible, it is impossible to determine whether it has been used by the secured party. Accordingly, all cash collateral shall be recorded as an asset by the party receiving it (the secured party), together with a liability for the obligation to return it to the payer (obligor), whose asset is a receivable.
Cash collateral used, for example, in securities lending transactions (see paragraphs ) shall be derecognized by the obligor and recognized by the secured party, not as collateral but rather as proceeds of either a sale or a borrowing. See paragraphs
for further discussion of recognition of cash and noncash collateral as proceeds of a transfer.
The accounting for noncash collateral by the obligor (or debtor) and the secured party depends on whether the secured party has the right to sell or repledge the collateral and on whether the obligor has defaulted. Noncash collateral shall be accounted for as follows:
- a
If the secured party (transferee) has the right by contract or custom to sell or repledge the collateral, then paragraph 860-30-45-1 requires that the obligor (transferor) reclassify that asset and report that asset in its statement of financial position separately (for example, as security pledged to creditors) from other assets not so encumbered. - b
If the secured party (transferee) sells collateral pledged to it, it shall recognize the proceeds from the sale and its obligation to return the collateral. The sale of the collateral is a transfer subject to the provisions of this Topic.
- c
If the obligor (transferor) defaults under the terms of the secured contract and is no longer entitled to redeem the pledged asset, it shall derecognize the pledged asset as required by paragraph 860-30-40-1 and the secured party (transferee) shall recognize the collateral as its asset. (See paragraph 860-30-30-1 for guidance on the secured party's initial measurement of collateral recognized. See paragraph 860-30-40-1 for further guidance if the debtor has sold the collateral.) - d
Except as provided in paragraph 860-30-40-1 the obligor (transferor) shall continue to carry the collateral as its asset, and the secured party (transferee) shall not recognize the pledged asset.
Paragraph
860-10-55-55A discusses securities lending transactions in which the criteria in paragraph
860-10-40-5 for a sale are met. The following guidance relates to securities lending or similar transactions in which a transferor (lender) transfers securities and receives either cash or securities as collateral and the transfer does not meet the sale criteria in that paragraph.
In a securities lending transaction, the transferor of securities being loaned accounts for cash received in the same way whether the transfer is accounted for as a sale or a secured borrowing. Cash collateral or securities received as collateral that a securities lender is permitted to sell or repledge are the proceeds of a borrowing secured by them. The cash received shall be recognized as the transferor's asset, as shall investments made with that cash, even if made by agents or in pools with other securities lenders, along with the obligation to return the cash. If securities that may be sold or repledged are received, the transferor of the securities being loaned accounts for those securities in the same way as it would account for cash received. See Example 1 (paragraph
860-30-55-1) for an illustration of a securities lending transaction that is accounted for as a secured borrowing in which cash collateral is transferred.
Obligations to return to the transferor assets borrowed and then sold have sometimes been effectively recognized as part of a liability for securities sold but not yet purchased, and this Section does not require any change in that practice.