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1.3 Transfers of financial assets subject to ASC 860
Publication date: 30 Sep 2020
us Transfers of financial assets guide
ASC 860 defines a transfer.
Definition from ASC 860-10-20
Transfer: The conveyance of a noncash financial asset by and to someone other than the issuer of that financial asset.
A transfer includes the following:
- Selling a receivable
- Putting a receivable into a securitization trust
- Posting a receivable as collateral.
A transfer excludes the following:
- The origination of a receivable
- Settlement of a receivable
- The restructuring of a receivable into a security in a troubled debt restructuring.
In summary, a transfer of a noncash financial asset involves the conveyance of that asset to a party other than the asset’s issuer. After the exchange, the transferred asset remains; that is, the exchange does not result in the settlement or extinguishment of the conveyed contract or instrument. Similarly, the origination of a financial asset is not a transfer, since the transaction does not involve a financial asset previously recognized by the issuer; in these instances, the exchange creates a financial asset.
Figure TS 1-4 lists transactions involving transfers of financial assets that fall within the scope of ASC 860, as discussed in ASC 860-10-05.
Figure TS 1-4
Transfers of financial assets within the scope of ASC 860
Transfers of financial assets within the scope of ASC 860
Transfers or transactions that typically qualify for sale accounting |
Transfers or transactions typically (or required to be) reported as secured borrowings |
Transfers of entire receivables or loans to an investor, with or without recourse |
Repurchase or reverse repurchase agreements |
Transfers of entire receivables or loans to a securitization entity that issues beneficial interests to third-party investors |
Securities lending arrangements |
Wash sales |
Pledges of collateral |
Transfers of accepted drafts arising from banker’s acceptances |
The foregoing is not an exhaustive list; there is a broad population of transferred financial assets subject to the guidance in ASC 860.
1.3.1 Transfers excluded from the scope of ASC 860
Transactions involving certain transfers are explicitly outside the scope of the guidance.
Excerpt from ASC 860-10-15-4
The guidance in this Topic does not apply to the following transactions and activities:
- Except for transfers of servicing assets (see Subtopic 860-50-40) and for the transfers noted in the following paragraph, transfers of nonfinancial assets
- Transfers of unrecognized financial assets, for example, lease payments to be received under operating leases
- Transfers of custody of financial assets for safekeeping
- Contributions (for guidance on accounting for contributions, see Subtopic 958-605)
- Transfers of in-substance nonfinancial assets, see Subtopic 610-20
- Investments by owners or distributions to owners of a business entity
- Employee benefits subject to the provisions of Topic 712
- Leveraged leases subject to Topic 842
- Money-over-money and wrap lease transactions involving nonrecourse debt subject to Topic 842.
Excerpt from ASC 860-10-15-5
Paragraph 815-10-40-2 states that transfers of assets that are derivative instruments and subject to the requirements of Subtopic 815-10 but that are not financial assets shall be accounted for by analogy to this Topic.
Even though ASC 860-50 prescribes the accounting for transfers of servicing rights, the derecognition model for those transactions differs from the guidance in ASC 860-10-40, which applies to transfers of financial assets. As noted above, servicing rights (assets) are not considered financial assets–hence the different derecognition requirements.
Question TS 1-2 and Question TS 1-3 illustrate the ASC 860 scope considerations in specific fact patterns.
Question TS 1-2
Company X has various interests in a consolidated operating company, including a $20 million subordinated loan. Company X subsequently assigns $10 million of that loan to Investor Co for cash. For purposes of Company X’s consolidated financial statements, does the guidance in ASC 860 apply to this exchange?
Company X has various interests in a consolidated operating company, including a $20 million subordinated loan. Company X subsequently assigns $10 million of that loan to Investor Co for cash. For purposes of Company X’s consolidated financial statements, does the guidance in ASC 860 apply to this exchange?
PwC response
No, this transaction does not fall within the scope of ASC 860, as the assigned loan, prior to transfer, is not recognized in Company X’s consolidated financial statements. Legally, the exchange involves a transfer of a financial asset–an assignment of a portion of a loan owed the parent. However, the level of analysis is Company X’s consolidated financial statements. In the context of those financial statements, the loan to the subsidiary was previously eliminated in consolidation. Therefore, for financial reporting purposes, the assignment is considered an issuance of a liability, and should be accounted for as such. As noted above, the origination of a receivable does not constitute a transfer subject to ASC 860; accordingly, Investor Co is deemed a lender, not a transferee.
Question TS 1-3
In connection with a refinancing permitted by the underlying indenture, a reporting entity exchanges one form of beneficial interests (certificates) in financial assets owned by a non-consolidated securitization trust for new certificates issued by the same trust. Is the transaction subject to ASC 860?
In connection with a refinancing permitted by the underlying indenture, a reporting entity exchanges one form of beneficial interests (certificates) in financial assets owned by a non-consolidated securitization trust for new certificates issued by the same trust. Is the transaction subject to ASC 860?
PwC response
No, the transaction falls outside the scope of ASC 860. The counterparty (trust) is the issuer of the certificates surrendered by the reporting entity, as well as the originator of the new certificates. As noted above, ASC 860-10-20 defines a transfer as "the conveyance of a noncash financial asset by and to someone other than the issuer of that financial asset." In this instance, the reporting entity would apply the guidance in ASC 310-20-35-9 through ASC 310-20-35-12 when accounting for the exchange.
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