Servicing assets and liabilities are contracts to service financial assets. They are either assets or liabilities, depending on whether the fees paid to the servicer are expected to be more or less than adequate compensation for the servicing. They are not financial assets and financial liabilities. However, the valuation of servicing assets and liabilities is similar to how financial instruments are valued, and therefore they are included in this chapter.

Servicing rights are recognized when a reporting entity transfers a financial asset in a transfer that qualifies for derecognition in its entirety but retains the right to service the financial asset for a fee. Such rights are recognized even if the fee is zero or if the right to service is obtained from a third party. ASC 860-50 requires the reporting entity to recognize either a servicing asset or a servicing liability for a servicing contract as follows:

Servicing rights do not meet the definition of a financial instrument because they represent a commitment to supply a service and can only be settled by delivery of the service. However, since servicing rights are essentially an expected stream of cash flows that result from a contractual agreement, they are similar to financial instruments and should be recognized and initially measured on the same basis as financial assets and liabilities. Therefore, servicing assets and liabilities are subject to the measurement requirements of ASC 820 when initially recognized at fair value.

US GAAP allows a fair value option for servicing assets and liabilities, which aligns their measurement with that of derivatives, which are measured at fair value.