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A transfer of a financial assets can take many forms; from the sale of a widely-held equity security for cash to sales of trade receivables to a securitization entity in exchange for cash, a subordinated economic interest in the receivables, and servicing rights. A transfer may involve the conveyance of all rights and title in a financial asset to its purchaser or, alternatively, a transferor may sell an ownership interest in only certain of an underlying financial asset’s cash flows. In other instances, the transferor may grant only a security interest in a financial asset pledged with the transferee.
ASC 860, Transfers and Servicing, provides comprehensive guidance to assist a transferor of financial assets to account for transactions that involve a transfer of a recognized financial asset or an interest therein. Perhaps most importantly, ASC 860 prescribes the conditions that a transfer must satisfy to allow the transferor to derecognize the financial asset from its balance sheet. The guidance in ASC 860 addresses not only the transferor’s accounting, but also informs the corresponding accounting by the transferee.
ASC 860’s derecognition model incorporates the so-called financial components approach. The fundamental tenets of that approach include:
  • The economic benefits provided by a financial asset (generally, the right to future cash flows) stem from the asset’s underlying contractual provisions, and the entity that controls those benefits should recognize them as its asset.
  • A financial asset should be considered sold–and therefore derecognized–if it is transferred and control is surrendered.
  • If a transferor has not surrendered control of a financial asset, derecognition is inappropriate; the asset should be considered pledged as collateral to secure an obligation of the transferor.
  • If a transferor has not surrendered control of a financial asset, derecognition is inappropriate; the asset should be considered pledged as collateral to secure an obligation of the transferor.
  • The recognition of financial assets (and liabilities) should not be affected by the sequence of transactions that led to their existence; the controlling principle instead is whether a transferor maintains effective control over a transferred asset.
  • Transferors and transferees should account for transfers of financial assets similarly (symmetrical reporting).
ASC 860’s derecognition model does not incorporate consideration of an asset’s “risks and rewards” and how a transfer impacts the transacting parties’ assumption or retention of those risks. Instead, it is a control-based framework.
To apply ASC 860’s derecognition template, companies must first identify which party to a transfer controls the financial assets after the exchange. This assessment should consider the transferor’s continuing involvement in the transferred financial asset, including all arrangements or agreements made contemporaneous with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. Under the financial components approach, an entity that has surrendered control over a transferred financial asset should derecognize the asset. Conversely, an entity must recognize all financial assets acquired (controlled), and any liabilities incurred, stemming from a transfer.
Figure TS 1-1 illustrates a decision tree to determine whether an exchange represents a transaction subject to the provisions in ASC 860.
Figure TS 1-1
ASC 860: scoping decision tree
Although assets arising from contracts to service financial assets are not financial assets, ASC 860 nonetheless provides guidance on how servicers are to account for these assets (and, if applicable, servicing liabilities). The guidance addresses initial recognition and subsequent measurement, and also specifies how a servicer should account for transfers of servicing rights to third parties. See TS 6 for more information.
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