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ASC 860-20-20 defines transferred financial assets.

Definition from ASC 860-20-20

Transferred Financial Assets: Transfers of any of the following:

  1. An entire financial asset
  2. A group of entire financial assets
  3. A participating interest in an entire financial asset.

The definition of transferred financial assets draws a distinction between an entire financial asset (or a group of entire financial assets) and a participating interest in an entire financial asset. See TS 2.4 for information on the conditions that a transferred portion of a financial asset must satisfy to be considered a participating interest under ASC 860.

2.2.1 GAAP before adoption of the participating interest model

Prior to the introduction of the participating interest concept, the derecognition model in ASC 860 (originally in FAS 140) did not distinguish between a transfer of an entire financial asset and a transfer of a partial ownership interest in an asset. This resulted in otherwise identical financing arrangements being tailored to achieve a desired derecognition (or secured borrowing) accounting outcome.
For example:
A transferor obtaining financing from an asset-backed commercial paper (ABCP) conduit to monetize $100 million of trade receivables under a revolving financing arrangement could choose between the following two structures. Assume the conduit is willing to provide financing equal to 90% of the receivables’ face value and all other relevant terms are the same.
  • Alternative 1: The BRE transfers to the ABCP conduit an undivided ownership interest in the pool of receivables that the BRE acquires from the transferor.
  • Alternative 2: The ABCP conduit lends $90 million to the BRE. The BRE grants the conduit a security interest in the pool of receivables, which constitute the BRE’s sole asset.

Before the adoption of the participating interest model
  • Alternative 1: The exchange involved a transfer subject to the provisions of ASC 860 that could have qualified for sale accounting. It would have been a conveyance of an ownership interest in the receivables pool.
  • Alternative 2: The exchange would have been accounted for as a secured borrowing. The conduit would have lent funds to the BRE in exchange for a security interest in the receivables. The conveyance of a security interest to the conduit would not have resulted in the transferor surrendering control over the receivables.

After the adoption of the participating interest model
  • Alternative 1: The exchange would be accounted for as a secured borrowing. The BRE’s conveyance of the undivided ownership interest to the conduit involves a transfer of only a portion of the receivables pool. That transferred portion (representing, effectively, a senior ownership interest in the receivables) would not satisfy the proportionate (pari passu) condition of a participating interest.
  • Alternative 2: The exchange would be accounted for as a secured borrowing.
Today, sellers of receivables to asset-backed commercial paper conduits commonly transfer receivables in their entirety to an agent bank, which holds the receivables for the benefit of the funding (owner) conduit. This legal form eliminates the need to consider the participating interest guidance (and allows sellers to achieve derecognition under the current ASC 860 model) as the transfer to the bank does not involve a portion of an asset.
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