elimination of qualifying special-purpose entities

Broad Transactions5

1. 860-10Overall860 Transfers and Servicing

   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.

2. 860-20Sales of Financial Assets860 Transfers and Servicing

   ASC 860-20 tells a transferor what to record once a transfer of financial assets qualifies as a sale under 860-10-40-5, and what happens if the transferor later regains control. For a sale of entire financial assets, the transferor derecognizes the assets, recognizes at fair value all assets obtained and liabilities incurred (cash, servicing assets/liabilities, beneficial interests, options, forwards, swaps), and books the gain or loss in earnings; for a participating interest, the prior carrying amount is allocated between the interest sold and the interest retained on relative fair values. If a change in law or circumstance causes the transferor to regain control, it rerecognizes the assets and related liabilities at fair value as if it purchased them, with no gain or loss on its beneficial interests.

3. 860-30Secured Borrowing and Collateral860 Transfers and Servicing

   ASC 860-30 governs transfers of financial assets that fail the sale conditions and therefore must be accounted for as secured borrowings, plus the accounting for collateral pledged in such transactions. The transferor keeps the transferred asset on its balance sheet with no change in measurement basis (860-30-25-2), reclassifying it separately (e.g., "securities pledged to creditors") if the secured party may sell or repledge it (860-30-45-1). Cash collateral — and securities collateral the holder may sell or repledge — is treated as proceeds of a borrowing rather than as collateral, and is recognized as an asset by the recipient with a corresponding obligation to return it (860-30-25-3, 25-8).

4. 860-40Transfers to Qualifying Special Purpose Entities860 Transfers and Servicing

   ASC 860-40 formerly governed transfers of financial assets to qualifying special-purpose entities (QSPEs), which under pre-2010 GAAP were exempt from consolidation and could support sale accounting for the transferor. Every substantive paragraph in the subtopic (Sections 05, 10, 15, 25, 40, 45 and 55) was superseded by ASU 2009-16 (formerly FAS 166), which eliminated the QSPE concept entirely. The subtopic is now an empty shell retained only for reference; transfers to securitization entities are analyzed under the general derecognition conditions of ASC 860-10 and the consolidation guidance in ASC 810.

5. 860-50Servicing Assets and Liabilities860 Transfers and Servicing

   ASC 860-50 governs when a servicer must separately recognize a servicing asset or servicing liability and how to measure it. A servicing contract is recognized separately each time an entity undertakes an obligation to service financial assets through a qualifying sale of an entire financial asset, group of entire financial assets, or participating interest, or through an acquisition/assumption of servicing for others' assets (860-50-25-1); it is initially measured at fair value (860-50-30-1) whether or not explicit consideration is exchanged. Subsequently, each class of servicing assets and liabilities is measured using either the amortization method (with impairment tested by stratum via a valuation allowance) or the irrevocable fair value measurement method (860-50-35-1).