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1.2 Financial assets within the scope of ASC 860
Publication date: 30 Sep 2020
us Transfers of financial assets guide
Only recognized financial assets fall within the scope of ASC 860. ASC 860 defines a financial asset.
Definition from ASC 860-10-20
Financial Asset: Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:
- Receive cash or another financial instrument from a second entity
- Exchange other financial instruments on potentially favorable terms with the second entity.
1.2.1 Items considered recognized financial assets
Investments in debt instruments that meet the definition of a financial asset include government and corporate bonds, beneficial interests in securitization entities, commercial loans, residential and commercial mortgages, installment loans, lease payments and certain guaranteed residual values under sales-type and direct finance leases, and credit card and trade receivables. Investments in equity interests, such as shares of common or preferred stock, also are financial assets.
Figure TS 1-2 lists various instruments, contracts, and agreements considered financial assets within the scope of ASC 860.
Figure TS 1-2
Examples of recognized financial assets
Examples of recognized financial assets
Description |
Analysis |
Installment loans, mortgage loans, commercial loans, and credit card and trade receivables |
Receivables and loans of all types are considered financial assets because they represent a contract that conveys to their holder a contractual right to receive cash or another financial instrument from another entity. |
Investments in debt securities |
A debt security is a financial asset because it conveys to its holder a contractual right to receive cash or another financial instrument from the security’s issuer. |
Beneficial interests issued by a securitization trust |
Beneficial interests are considered financial assets because they convey to the holder a contractual right to receive cash or another financial instrument from the issuing trust. Whether the trust holds financial assets or nonfinancial assets (e.g., title to automobiles) does not alter this conclusion. |
Non-controlling investments in common stock or other forms of ownership interests accounted for at fair value or under the equity-method |
Irrespective of how they are measured, investments in common stock or other forms of equity interests are ownership interests, and thus are financial assets. Therefore, transfers of these assets, including equity method investments, are accounted for in accordance with ASC 860.
However, if the investments are promised to a counterparty in a contract along with other nonfinancial assets, and substantially all the fair value of the promised assets is concentrated in the nonfinancial assets, the investments are scoped out of ASC 860 and may be within the scope of ASC 610-20. |
Ownership interest in a non-consolidated subsidiary (controlled investee) carried at fair value |
Investments in controlled subsidiaries carried at fair value according to industry practice (e.g., an investment company) are considered financial assets, as the holder will realize its investment by disposing of it. |
Derivative assets that are not financial assets, such as a physically settled commodity forward contract |
Transfers of assets that are derivative instruments subject to ASC 815, but are not financial assets, are governed by ASC 860. See ASC 815-10-40-2 for further details. |
Forward contract on a financial instrument that must be (or may be) physically settled |
Forward contracts on financial instruments in an asset position can be a financial asset because they convey a contractual right (a) to receive cash or another financial instrument from another entity or (b) to exchange other financial instruments on potentially favorable terms with the other entity.
|
Receivables arising from sales-type and direct-financing leases |
Sales-type and direct-financing lease receivables are considered financial assets because they arise from a contract (the lease) that conveys to the lessor a contractual right to receive cash or another financial instrument from the lessee. |
Lease residual value guaranteed at commencement of a lease |
The residual value of a leased asset guaranteed at the lease’s commencement is a financial asset. See ASC 860-10-55-6. |
Legal settlements-contractual payment plan |
The analysis of legal settlements depends on facts and circumstances. If the right to payments has been reduced to a contract enforceable by a government or a court of law, the arrangement is a financial asset. |
Question TS 1-1 discusses a transaction within the scope of ASC 860.
Question TS 1-1
Finance Co originates unsecured consumer loans. Loans written off as uncollectible are periodically pooled and sold to a collection agency. Bank Co receives a cash payment at the transfer date, and is entitled to receive additional consideration if the transferred pool subsequently generates a return above a hurdle rate.
Does ASC 860 apply to these transfers?
Finance Co originates unsecured consumer loans. Loans written off as uncollectible are periodically pooled and sold to a collection agency. Bank Co receives a cash payment at the transfer date, and is entitled to receive additional consideration if the transferred pool subsequently generates a return above a hurdle rate.
Does ASC 860 apply to these transfers?
PwC response
Yes, ASC 860 applies to these transfers. Although the transferred loans have no carrying value at the transfer date, the loans represented recognized financial assets when originated by Finance Co. Despite the subsequent write off, the credit agreement (contract) underlying each origination remains in effect. In our view, the write off stems from Finance Co’s application of a measurement convention and, as such, should not be considered to alter the initial characterization of the loan as a recognized financial asset. The transfer of a written-off loan should be analyzed no differently than the conveyance of loan having a remaining (recognized) cost basis that has been fully reserved in a contra account for loan losses.
1.2.2 Items not considered recognized financial assets
Figure TS 1-3 lists various instruments, contracts, and agreements that are not considered recognized financial assets within the scope of ASC 860. The list also includes financial assets that are explicitly scoped out of ASC 860.
Figure TS 1-3
Examples that are not considered recognized financial assets
Examples that are not considered recognized financial assets
Description |
Analysis |
Equity interest in a consolidated subsidiary |
An ownership interest in a consolidated subsidiary is evidence of control of the entity’s individual assets and liabilities, in contrast to an investment in a single financial asset or a group of financial assets. However, ASC 860 does apply to the transfer of an equity interest in a consolidated subsidiary by its parent if that consolidated subsidiary holds only financial assets. See also ASC 810-10-45-22. |
Right to receive future fees under Rule 12b-1 of the Investment Company Act of 1940 |
Until earned, the right to receive 12b-1 fees is not a recognized asset. Thus, any transfer of the right to receive future fees is an exchange outside the scope of ASC 860. However, once the fee is earned, the receivable recognized by its recipient is a financial asset. See ASC 946-605-25 for further information. |
Insurance contracts |
Under an insurance contract, premium payments may be received over time in exchange for writing protection. Those future revenue streams are not currently recognized as financial assets. See ASC 470-10-25 for further information. |
Lease residual value that is guaranteed after lease commencement and unguaranteed lease residuals |
Unguaranteed residual values of a leased asset are not financial assets, nor are residual values guaranteed after the lease’s commencement date. Only the residual value of a leased asset guaranteed at the lease’s commencement date qualifies as a financial asset. See ASC 842 for further information. |
Lease payments receivable under an operating lease |
Lease payments receivable under an operating lease are unrecognized financial assets. See ASC 842 for further information. |
Legal settlements - no contractual payment plan |
The analysis of legal settlements depends on facts and circumstances. Until a judgment from litigation has been reduced to a contract (payment plan) enforceable by a government or a court of law, the arrangement is not a financial asset. |
Taxes receivable (sales and property) |
Receivables arising from sales and property taxes are not considered a financial asset, since they arise from an imposition of an obligation by law or regulation. The receivable is considered a financial asset only if the parties agree to payment terms in accordance with a contract. |
Sale of future revenues |
In a sale of future revenues in exchange for cash, the seller agrees to make payments to an investor in an amount related to revenue or income to be earned or received in the future. Those future revenue or income streams are not currently recognized financial assets. See ASC 470-10-25 for further information. |
Servicing rights |
Servicing rights arise from a contract that obligates an entity (servicer), in exchange for periodic fees (revenue), to service financial assets. The right to receive future revenue in exchange for services is not considered a financial asset. However, ASC 860-50 prescribes measurement and derecognition standards for contracts to service financial assets (servicing assets and liabilities). |
Shareholder note - classified in equity |
A shareholder note classified in equity is not a recognized financial asset. The note is reported as a component of equity – in contrast to a recognized (standalone) financial asset. |
Securitized stranded utility costs |
Although stranded costs may represent a utility’s enforceable right to recover such costs from ratepayers, that right stems from an action undertaken by a government authority or utility commission. Since the right does not stem from a contract, the stranded costs are not considered financial assets. However, as noted in the preceding table, beneficial interests in securitized stranded costs have the characteristics of a financial asset. |
Treasury stock |
Treasury stock is recognized as a contra-equity account and is not a financial asset. |
Transfers of in substance nonfinancial assets |
“In substance nonfinancial assets” is defined in ASC 610-20, in part, as “a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets.” This means that an entity is not required to separately account for financial assets in accordance with ASC 860 if substantially all the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. |
Value-added tax (VAT) receivable |
A VAT-related receivable is not considered a financial asset because the receivable arises from the imposition of an obligation (taxes) by law or regulation. To be considered a financial asset, the right to receive cash or another financial asset must arise from a contract between the parties. |
ASC 860-10-55-5 through ASC 860-10-55-17C contain implementation guidance to assist a reporting entity in applying the term "financial asset."
1.2.3 Recognized financial assets as a result of a transfer
A transfer of a contract or an agreement (or an interest therein) may represent a transaction whose accounting is outside the scope of ASC 860. However, the transaction frequently will result in the recognition of a financial asset by the transferee (purchaser) as the parties will have executed a contract governing the exchange, and the transferee will have paid consideration. For example, assume Company A sells to Company B, for cash, an interest in Company A’s right to receive future revenue (currently unrecognized on Company A’s books). Company B would recognize a receivable for the right to receive the future revenue, presumably equal to the cash consideration paid. If, at a later date, Company B were to sell an interest in that receivable to Company C, that exchange would involve the transfer of a financial asset whose accounting would be governed by ASC 860.
Similarly, if Company A were to transfer its right to receive future revenues to a securitization trust, beneficial interests issued by the trust (e.g., trust certificates) would be considered financial assets by their holders.
1 Under ASC 610-20, entities will no longer “look through” equity method investments to determine if the underlying assets should be accounted for under other guidance, as was previously required under the real estate-specific guidance.
2 Assets that have the potential to be financial assets or financial liabilities, such as forwards and swaps, must meet the criteria of both ASC 860 and ASC 405-20-40-1 in order to be derecognized.
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