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22.3 Disclosure objectives and aggregation of disclosures
Publication date: 12 Nov 2019
us Financial statement presentation guide
The disclosure requirements under US GAAP capture a broad array of transactions involving the transfer of a financial asset. As explained more fully in TS 3, a reporting entity first determines whether a transfer meets the criteria for sale accounting (derecognition) in ASC 860 or whether the transfer should be reported as a secured borrowing. This determination dictates the characterization of the transaction for financial statement purposes. The scope and content of the required disclosures depend, in part, on the accounting for the transfer (sale or secured borrowing) and the extent to which the transferor continues to be involved with the asset(s) subsequent to the transfer.
For the most part, the disclosure provisions in ASC 860 are detailed and prescriptive. However, reporting entities should keep in mind the broader disclosure objectives of ASC 860 when applying the requirements in practice. This is particularly true when a reporting entity is evaluating how to summarize and present information about numerous complex transactions involving transfers of financial assets in a manner most useful to readers.
22.3.1 Disclosure objectives
ASC 860-10-50-3 cites four broad objectives that frame the specific disclosure requirements set forth elsewhere in ASC 860. A reporting entity may need to supplement those required disclosures with additional information to achieve the broad disclosure objectives. In this regard, ASC 860-10-50-4 emphasizes that a reporting entity should pay particular attention to disclosing the facts and circumstances of a transfer, the nature of its continuing involvement with transferred financial assets, and the effect that such involvement may have on the reporting entity’s financial position, financial performance, and cash flows.
A reporting entity’s “continuing involvement” with transferred assets can take many forms, consistent with the Master Glossary’s broad definition.
Excerpt of definition from ASC 860-10-20
Continuing Involvement: Any involvement with the transferred financial assets that permits the transferor to receive cash flows or other benefits that arise from the transferred financial assets or that obligates the transferor to provide additional cash flows or other assets to any party related to the transfer.
Common forms of continuing involvement on the part of the transferor include:
- Contracts to service the assets subsequent to transfer
- Seller representations and warranties with respect to the assets sold
- Recourse or guarantee arrangements relating to the transferred assets, or similar undertakings
- Derivatives, such as interest rate swaps and call options, executed with the transferee contemporaneously with, or in contemplation of, the transfer
- Beneficial interests (e.g., debt securities and/or trust certificates) issued by a securitization vehicle that acquired the financial assets
TS 3.4 and ASC 860-10-05-4 provide additional examples of potential forms of continuing involvement by a transferor.
The ASC 860 sale accounting model requires consideration of all forms of involvement that the reporting entity (including consolidated affiliates and agents) has or expects to have with transferred financial assets. The underlying sale accounting analysis (including related legal opinions, if any) may serve as a useful starting point for identifying elements of continuing involvement that may warrant disclosure.
22.3.2 Aggregation of disclosures
ASC 860-10-50-4A permits a reporting entity to aggregate disclosures for multiple transfers having similar characteristics if separate reporting of each transfer would not provide financial statement users with information that is more useful. However, at a minimum, aggregated disclosures generally should distinguish between transfers that are accounted for as sales and those that are accounted for as secured borrowings. Transfers that are accounted for as sales should also distinguish between (1) transfers to securitization entities and (2) all other transfers. Reporting entities should also disclose how similar transfers have been aggregated.
ASC 860-10-50-5 provides the following quantitative and qualitative considerations when determining how to aggregate:
- The nature of the transferor’s continuing involvement
- The types of assets transferred
- Risks attributable to the transferred assets that the transferor continues to bear and how that risk profile changed because of the transfer
- Information regarding risks and uncertainties required to be disclosed in ASC 310-10-50-25 and concentrations involving loan product terms
We believe reporting entities that intend to provide aggregated information about multiple transfers of financial assets may also consider the following characteristics when evaluating the most meaningful basis on which to aggregate this information:
- The legal form of the financial assets transferred
- If receivables or loans have been transferred, whether they are collateralized and, if so, the type of collateral (e.g., first-lien residential mortgage loans, second-lien home equity loans, commercial real estate loans, and auto loans)
- The nature and extent of the transferor’s continuing involvement with the transferred assets (e.g., subordinated or senior beneficial interests issued by securitization trusts, guarantees or similar credit support arrangements, or derivative instruments, such as interest rate or total return swaps)
- Similar valuation assumptions and techniques used to measure beneficial interests in the transferred assets
We understand that the SEC staff has required SEC registrants to provide the disclosures called for in ASC 860-20-50 (see FSP 22.4) by each type of asset sold in securitization transactions.
Striking a balance between disclosures that are too detailed or too aggregated can be highly facts-and-circumstances specific. However, ASC 860-10-50-6 reminds reporting entities that, regardless of their relative level of detail, the disclosures should “clearly and fully” explain the following:
- The transferor’s risk exposure related to transferred financial assets
- Any restrictions on the assets of the reporting entity stemming from these transactions
22.3.3 Location of disclosures
In practice, we find that reporting entities sometimes incorporate ASC 860-related disclosures into footnotes that address broader topical matters or provide information required by other accounting pronouncements, including the following:
- Providing information about transfers of financial assets to securitization entities and describing the forms of involvement with those assets and beneficial interests retained in a footnote that also discloses information about variable interest entities required by ASC 810, Consolidation (see FSP 18)
- Disclosing information about repurchase and resale agreements, and securities lending activities, in a footnote that also addresses the reporting entity’s collateralized financing activities more generally
- Providing information about the reporting entity’s approach to valuing servicing assets and servicing liabilities in a footnote that also discloses information about fair value measurements for all asset classes in accordance with ASC 820, Fair Value Measurement (see FSP 20)
22.3.4 Considerations for consolidated financial statements
When evaluating the necessary disclosures, a reporting entity should consider not only the transferor’s involvement with transferred financial assets, but also involvements on the part of the transferor’s consolidated affiliates included in the financial statements presented and the transferor’s agents. For disclosure purposes, involvement by consolidated affiliates and agents is considered equivalent to involvement by the transferor itself, as noted in ASC 860-10-50-7.
22.3.5 Accounting policy disclosures footnote
A reporting entity should describe its principal accounting policy for transfers of financial assets if such transactions are common and/or material. This policy disclosure should be tailored to address specific types of transfers that the reporting entity has undertaken or that remain outstanding.
Figure FSP 22-1 is a sample summary of a reporting entity’s accounting policies relating to transfers of financial assets generally. More prescriptive accounting policy disclosures required by ASC 860 or Regulation S-X with respect to such transfers are discussed in the remainder of this chapter.
Figure FSP 22-1
Sample disclosure—summary of significant accounting policies for transfers of financial assets
Sample disclosure—summary of significant accounting policies for transfers of financial assets
Note X—Summary of Significant Accounting Policies
Transfers of Financial Assets
The Company accounts for transfers of financial assets as sales when it has surrendered control over the related assets. Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of the Company’s continuing involvement with the assets transferred. Gains and losses stemming from transfers reported as sales are included in “[line item]” in the accompanying statements of income. Assets obtained and liabilities incurred in connection with transfers reported as sales are initially recognized in the balance sheet at fair value.
Transfers of financial assets that do not qualify for sale accounting are reported as collateralized borrowings. Accordingly, the related assets remain on the Company’s balance sheet and continue to be reported and accounted for as if the transfer had not occurred. Cash proceeds from these transfers are reported as liabilities, with attributable interest expense recognized over the life of the related transactions.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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