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22.4 Transfers with continuing involvement reported as sales
Publication date: 12 Nov 2019
us Financial statement presentation guide
ASC 860-20-50-3 and ASC 860-20-50-4 prescribe the disclosures for securitizations, asset-backed financing arrangements, and similar transfers that meet the following two conditions:
Excerpt from ASC 860-20-50-2
- The transfer is accounted for as a sale
- The transferor has continuing involvement with the transferred financial assets.
Certain disclosures for these types of transfers are required for each income statement presented, while others must be made for each balance sheet presented.
22.4.1 Disclosures for each income statement presented
As discussed in ASC 860-20-50-3, for each period for which an income statement is presented, disclosure requirements for transfers reported as sales with transferors having continuing involvement include:
- Characteristics of the transfer
This information should include (1) a description of the reporting entity’s continuing involvement with the transferred assets, (2) the nature and initial fair value of proceeds obtained and liabilities incurred, and (3) the gain or loss on sale. - Information about initial fair value measurements of assets obtained and liabilities incurred in connection with the transfer
This should include their level within the fair value hierarchy, key inputs and assumptions used in measuring fair values, and valuation techniques used. The reporting entity should provide quantitative information about (1) assumed discount rates, (2) expected prepayments (including the expected weighted-average life of prepayable financial assets), and (3) anticipated credit losses, including expected static pool losses.The reporting entity may report the range of assumptions used if it has aggregated its transfer-related disclosures. - Cash flows between the transferor and transferee(s)
There should be separate disclosures of (1) proceeds from new transfers, (2) proceeds from collections reinvested in revolving-period transfers, (3) purchases of previously transferred financial assets, (4) servicing fees, and (5) cash flows received from interests (including beneficial interests) in the transferred assets held by the transferor.
22.4.2 Disclosures for each balance sheet presented
As of each balance sheet date, regardless of when the related transfer occurred, ASC 860-20-50-4 requires a transferor to disclose the following information about its ongoing involvement with the financial assets sold:
- Qualitative and quantitative information about the transferor’s continuing involvement with transferred financial assets
Information to be disclosed includes:- With respect to the transferred assets, (1) the total amount of principal outstanding at the balance sheet date, (2) the amount that has been derecognized, and (3) the amount that continues to be recorded in the balance sheet
- Contractual arrangements that could require the reporting entity to provide financial support (e.g., liquidity arrangements and obligations to purchase assets) to the transferee or its beneficial interest holders
- A description of circumstances that could expose the reporting entity to loss, and the amount of maximum exposure to loss, stemming from contractual support arrangements
- The type, amount and reason for any support–financial or otherwise—provided by the reporting entity to the transferee (or its beneficial interest holders) that was not previously contractually required. Additionally, if the reporting entity assisted the transferee (or its beneficial interest holders) in obtaining support, that should be disclosed.
- A reporting entity is encouraged–but not required—to disclose any third-party liquidity arrangements, guarantees, and/or other commitments that may affect the fair value of the reporting entity’s interest in the transferred assets.
These disclosures should allow financial statement users to readily comprehend the reason(s) for the reporting entity’s continuing involvement with the transferred financial assets and the risk profile of that involvement. The disclosures should also clarify whether and how the transfer altered the reporting entity’s risk profile to those assets, including (but not limited to) credit and interest rate risk.
- Information relating to subsequent measurements of assets or liabilities attributable to the reporting entity’s continuing involvement with transferred financial assets
Information to be disclosed includes:- A discussion of relevant accounting policies
- Key assumptions (or range of assumptions, if the disclosures have been aggregated) used to measure the fair value of such assets or liabilities, including, but not limited to, (1) discount rates, (2) expected prepayments (including the expected weighted-average life of prepayable financial assets), and (3) anticipated credit losses, including expected static pool losses, if applicable
- Sensitivity analysis
This disclosure should include the hypothetical impact on the fair value of a transferor’s interests in the transferred assets (including servicing assets and servicing liabilities) stemming from two or more unfavorable variations from expected levels for each key assumption, keeping all other key assumption(s) unchanged. Further, the reporting entity should describe the objectives, methodology, and limitations of the sensitivity analysis or stress test.In practice, although there is no explicit requirement, certain reporting entities stress their key assumptions using variations of 10% and 20%. However, a reporting entity should use the thresholds that it considers most meaningful in the circumstances.
- Asset quality of transferred financial assets and managed assets
This includes:- Information about the asset quality of transferred financial assets and any other assets the reporting entity manages together with them (separated between assets that have been derecognized and assets that continue to be recognized)
- For receivables, delinquencies at the end of the period and credit losses, net of recoveries, during the period
This asset quality information is intended to provide financial statement users with an understanding of the risks inherent in the transferred financial assets within the broader context of other financial assets and liabilities (and the associated risks) the reporting entity manages together with transferred assets.
The disclosures in ASC 860-20-50-4 are in addition to those that may be required under other US GAAP. For example, a reporting entity that owns a beneficial interest in transferred financial assets in the form of an asset-backed security should also consider the disclosure requirements in ASC 320, Investments in Debt Securities, applicable to debt securities more generally. See FSP 9 for a discussion of those requirements.
Figure FSP 22-2 illustrates a sample disclosure for a securitization of receivables (in this case, loans secured by automobiles) reported as a sale with continuing involvement. For simplicity, this sample disclosure omits any required comparative amounts.
Figure FSP 22-2
Sample disclosure—securitizations of auto loans reported as sales with beneficial interests obtained and servicing retained
Sample disclosure—securitizations of auto loans reported as sales with beneficial interests obtained and servicing retained
Note X—Securitization of Automobile Loans
During 20X7, the Company sold pools of automobile loans in various securitization transactions. In these securitizations, the Company retained servicing responsibilities and received beneficial interests in the form of subordinated asset-backed securities. The Company owns only an insignificant portion of these subordinated securities and receives annual servicing fees approximating x% of the outstanding principal balance of the loans serviced. The Company and other investors in the subordinated beneficial interests have rights to cash flows after the investors holding each securitization trust’s senior securities have first received their contractual returns. The investors and the securitization trusts have no recourse to the Company’s assets; holders of the securities issued by each trust can look only to the loans owned by the trust for payment. The beneficial interests held by the Company are subject principally to the credit risk stemming from the underlying transferred auto loans.
The securitization trusts used to effect these transactions are variable interest entities that the Company does not consolidate. See Note Z, “Variable Interest Entities,” for more information about these trusts.
The asset-backed securities received in connection with these transactions are initially measured in the Company’s balance sheet at their fair value. Related servicing assets are also initially recognized at fair value. Gains or losses arising from these securitizations are measured as the difference between the transferred loans’ carrying values and the sum of (a) the initial fair value of the beneficial interests received and any servicing asset and (b) cash proceeds. In 20X7, the Company recognized pretax gains of $xx.x million attributable to the foregoing securitization activity. These gains are included in “[line item]” reported in the accompanying statements of income.
Quoted market prices are rarely available for beneficial interests obtained in connection with these transactions. Accordingly, the Company generally estimates the initial fair value of its subordinated interests based on the present value of expected future cash flows. These cash flows are calculated using best estimates of market-based assumptions—anticipated credit losses, prepayment speeds and weighted average lives of the related loans, and discount rates commensurate with the risks inherent in the interests. These estimates are sometimes developed based on inputs observable in relevant markets, in which case the beneficial interests may fall within Level 2 of the fair value hierarchy. In other instances, because certain of the inputs used are not observable, the beneficial interests fall within Level 3 of the hierarchy.
Key economic assumptions used in measuring the beneficial interests obtained at the securitization date resulting from securitizations completed during 20X7 were as follows:
- Expected credit losses on underlying loans: x.x% to x.x% (annual rate)
- Expected annual prepayment rate of underlying loans: x.x% to x.x%
- Weighted average life of underlying loans: x.x to x.x (years)
- Rates used to discount residual cash flows: xx.x% to xx.x%
The Company remeasures the carrying value of its subordinated beneficial interests and servicing assets at each reporting date to reflect their current fair value, with corresponding gains and losses credited or charged to income. At December 31, 20X7, key economic assumptions and the sensitivity of the current fair value of the subordinated beneficial interests held by the Company to 10% and 20% adverse changes in those assumptions are as follows ($ in millions):
20X7 |
|
Carrying amount/fair value of subordinated beneficial interests |
$x,xxx |
Weighted average life of underlying loans (years) |
x.x-x.x |
Assumed prepayments (annual rate) |
x.x-x.x% |
Impact of 10% adverse change |
$(xx) |
Impact of 20% adverse change |
$(xxx) |
Expected credit losses (annual rate) |
x.x-x.x% |
Impact of 10% adverse change |
$(xx) |
Impact of 20% adverse change |
$(xxx) |
Annual rate used to discount residual cash flows |
xx.x-xx.x% |
Impact of 10% adverse change |
$(xx) |
Impact of 20% adverse change |
$(xxx) |
These sensitivities are hypothetical and should be viewed in that context. As the figures indicate, the change in fair value based on a stated percentage variation in an assumption generally cannot be extrapolated because the relationship between the change in an assumption and the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the beneficial interests is calculated independently of any other assumption. In reality, changes in one assumption may result in changes to other(s), leading to a combined effect that could magnify or counteract the indicated change in value. For example, increases in market interest rates generally slow prepayments and may lead to increased credit losses.
The following table summarizes certain cash flows received from and paid to securitization trusts during 20X7 ($ in millions):
Proceeds from securitizations |
$x,xxx |
Servicing fees received |
xx |
Principal and interest collections received on subordinated beneficial interests |
xxx |
Purchases of delinquent loans, and payments relating to seller representation and warranty recourse obligations |
(xx) |
The following table presents quantitative information about automobile loans managed by the Company (including those owned and securitized) and related delinquent loans ($ in millions) as of December 31,20X7:
Principal amount of loans |
Principal amount of loans 60 days or more past due |
Net credit losses (charge offs) during 20X7 |
|
Total loans managed (owned and securitized) |
$x,xxx |
$xxx |
$xx |
Components of managed loans: |
|||
Securitized loans |
x,xxx |
xx |
xx |
Loans held in portfolio or for sale |
xxx |
xx |
x |
22.4.3 Disclosure of sales that retain economic exposure
ASC 860-20-50-4D requires reporting entities to disclose certain information about transactions that (1) involve a transfer of a financial asset reported as a sale and (2) are accompanied by an agreement (entered into with the transferee in contemplation of the transfer) that results in the reporting entity retaining substantially all of the exposure to the economic risk and returns of the transferred asset during the transaction’s term. Examples of these transactions include:
- Cash-settled repurchase agreements having a fixed or determinable redemption price that settle prior to the maturity date of the transferred financial asset
- Transfers of financial assets accompanied by an agreement under which the reporting entity retains substantially all of the transferred asset’s economic returns through the term of the transaction (e.g., in the form of a total return swap that runs either to maturity of the financial asset or for a shorter time period during which economic exposure is maintained)
Transfers of financial assets meeting the two conditions cited in ASC 860-20-50-2 (see FSP 22.4) are scoped out of the disclosure requirements of ASC 860-20-50-4D. These transfers would be subject to the detailed disclosure requirements in ASC 860-20-50-3 and ASC 860-20-50-4 (See FSP 22.4.2).
Similarly, the disclosure provisions do not extend to repurchase agreements accounted for as sales because the financial assets to be reacquired fail to meet the conditions in ASC 860-10-40-24(a) to be considered “substantially the same.”
Under ASC 860-20-50-4D, a reporting entity is required to disclose the following about transactions subject to its scope at each reporting date:
Excerpt from 860-20-50-4D
- The carrying amount of assets derecognized as of the date of derecognition:
- If the amounts that have been derecognized have changed significantly from the amounts that have been derecognized in prior periods or are not representative of the activity throughout the period, a discussion of the reasons for the change shall be disclosed.
- The amount of gross cash proceeds received by the transferor for the assets derecognized as of the date of derecognition.
- Information about the transferor’s ongoing exposure to the economic return on the transferred financial assets:
- As of the reporting date, the fair value of assets derecognized by the transferor.
- Amounts reported in the statement of financial position arising from the transaction (for example, the carrying value or fair value of forward repurchase agreements or swap contracts). To the extent that those amounts are captured in the derivative disclosures presented in accordance with paragraph 815-10-50-4B, an entity shall provide a cross-reference to the appropriate line item in that disclosure.
- A description of the arrangements that result in the transferor retaining substantially all of the exposure to the economic return on the transferred financial assets and the risks related to those arrangements.
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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