AAG-INV 2.137-2.145 clarified the accounting treatment under ASC 860 for collateral received under securities lending arrangements. When cash is received, the cash received should be recorded in the fund's financial statements as an asset along with a corresponding obligation to return the cash. If the cash received is invested by the fund, even if the investment is made by agents or in pools with other securities lenders, the financial statements should reflect that investment in the schedule of investments, including footnoting any restrictions related to that investment.

If securities are received as collateral and those securities may be sold or repledged, then generally the fund should account for these securities in the same manner as if cash were received in the event that the borrower has defaulted. If the fund has sold or repledged the securities collateral, it would record the proceeds from the sale and the obligation to return the securities collateral to the borrower. If the fund received securities as collateral and does not have the right to sell or repledge, then generally the fund should not record the securities as an asset or the related liability in the financial statements. The total value of the securities on loan should be disclosed parenthetically as part of the "Investments" caption on the face of the statement of assets and liabilities in lieu of the ASC 860 requirement to present securities on loan in a completely separate balance sheet caption. Refer to TS, PwC’s accounting and financial reporting guide, Transfers and servicing of financial assets, for more information.

A fund that uses a third-party intermediary to facilitate its securities-lending program may receive periodic payments that represent the interest income earned on the reinvested collateral, less interest expense paid on the collateral received and expenses paid to the intermediary. Securities lending transactions where cash collateral is being reinvested in a manner that effectively leverages the fund should be carefully evaluated to determine whether net presentation in the statement of operations remains appropriate.

For purposes of evaluating the criteria in ASC 230-10-15-4 to determine if the fund meets the exemption for little or no debt, TIS Section 6910.25 indicates that fund liabilities that represent financing transactions would be considered debt, unless the proceeds from the transaction are invested in cash or cash equivalents. This would exempt most traditional securities' lending transactions from being considered debt, but, as noted above, careful consideration of this should be made for transactions that may appear to be more akin to leverage of the fund’s portfolio.