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To determine the accounting treatment for the transfer of a financial asset within the scope of ASC 860, a transferor must first determine whether the transfer involves an entire financial asset or only a "component" (or a "portion") of that asset. ASC 860-10-40-4D provides guidance on when sale accounting may be applicable to transfers of a portion of a financial asset.

Excerpt from ASC 860-10-40-4D

To be eligible for sale accounting, an entire financial asset cannot be divided into components before a transfer unless all of the components meet the definition of a participating interest. The legal form of the asset and what the asset conveys to its holders shall be considered in determining what constitutes an entire financial asset (for implementation guidance, see paragraph 860-10-55-17E).

As a general rule, an entire financial asset (or a group of entire financial assets) should be considered transferred when full title to, and ownership of, the financial asset is conveyed to the transferee. That is, as a result of the transfer, the transferee now holds legal title to the asset and, as a consequence, can exercise the rights (and must observe any obligations) prescribed in the underlying assigned contract or instrument negotiated with its issuer. However, as discussed in the following section, to conclude that a transfer involves an entire financial asset, conditions in addition to the conveyance of legal ownership to the transferee may also need to be satisfied.

2.3.1 Transfers of interests involving loans

ASC 860 provides implementation guidance to assist in determining whether a transfer involves a loan in its entirety or only a portion.

ASC 860-10-55-17F

A loan to one borrower in accordance with a single contract that is transferred to a securitization entity before securitization shall be considered an entire financial asset. Similarly, a beneficial interest in securitized financial assets after the securitization process has been completed shall be considered an entire financial asset. In contrast, a transferred interest in an individual loan shall not be considered an entire financial asset; however, if the transferred interest meets the definition of a participating interest, the participating interest would be eligible for sale accounting.

ASC 860-10-55-17G

In a transaction in which the transferor creates an interest-only strip from a loan and transfers the interest-only strip, the interest-only strip does not meet the definition of an entire financial asset (and an interest-only strip does not meet the definition of a participating interest; therefore, sale accounting would be precluded). In contrast, if an entire financial asset is transferred to a securitization entity that it does not consolidate and the transfer meets the conditions for sale accounting, the transferor may obtain an interest-only strip as proceeds from the sale. An interest-only strip received as proceeds of a sale is an entire financial asset for purposes of evaluating any future transfers that could then be eligible for sale accounting.

A lender may seek to reduce its exposure to a borrower by selling a participation in its loan to one or more investors or assigning its rights and obligations under the loan agreement to another party. The legal characteristics of a typical loan assignment and a loan participation and their potential implications on the transfer accounting assessment, are discussed in the following sections.

2.3.1.1 Assignments of loans

Loan assignments typically involve loan agreements with multiple lenders (syndicated loans). The loan agreement frequently contains provisions that allow a member of the lender group to assign all or a portion of its loan to another party. Sometimes, the lead bank in a loan syndication may be unable to arrange for all investor (lenders) to fund the underlying loan at the origination date. In these circumstances, the lead bank may fund more of the loan at origination than it anticipated or desired. After the loan is originated, the lead bank may assign (sell) a portion of the loan that it has funded to one or more investors in accordance with the loan agreement’s assignment provisions. Other members of the lending group may also assign their loans post-origination.
In a loan assignment, each assignee (transferee) is added to the loan agreement and becomes a legal creditor. The assignee is legally owed interest and principal by the borrower, and is entitled to exercise the rights of a creditor specified in the loan agreement.
An assignor (transferor) may sell the entirety of its loan to the assignee or may retain some of the loan and remain a member of the lender group. When the assignor remains a member of the lender group, we generally believe the assignment should be analyzed as a transfer of a component or portion of the loan held by the assignor. In these circumstances, the transferor must apply the participating interest guidance when evaluating the appropriate accounting for the assigned portion. However, an assignment of a loan may be considered a transfer of an entire financial asset, even when the assignor remains a creditor under an overarching loan agreement. The presumption that an assignment requires consideration of the participating interest guidance when an assignor remains a creditor of the loan obligor may be overcome when:
  • The assignment consists of a transfer of the entirety of a loan that is legally separate and distinct from the loan retained by the assignor, even though the two loans may be governed by the same overarching credit agreement (see Example TS 2-2 and Example TS 2-3); or
  • The underlying lending agreement involves multiple advances and the assigned loan "retains its identity," as discussed in TS 2.3.2.
When a loan held by a transferor is part of a larger (syndicated) loan having multiple creditors (with each creditor having funded its portion of the overall loan), from the transferor’s perspective, the entire financial asset consists only of the loan funded and recognized on the transferor’s balance sheet. Consequently, assuming an assignment involves only a portion of a loan, the transferor’s application of the participating interest rules to that assigned portion considers only the characteristics of the loan held by the assignor; loans held by other members of the lending group should be excluded from the analysis.
Example TS 2-1 illustrates this concept.
EXAMPLE TS 2-1
Loan assignment—unit of analysis
Bank Co, along with other lenders, originates a $500 million syndicated loan to Big Corp. Bank Co’s commitment, fully funded at closing, is $50 million. Under the overarching loan agreement, the note held by Bank Co is subordinate to the other lenders should an event of default, as defined in the loan agreement, take place.
Bank Co subsequently assigns a portion of its loan ($25 million) to Investor Co, who is added to the loan agreement as a subordinated creditor.
When assessing whether the assigned portion has the attributes of a participating interest, should Bank Co consider the entire financial asset to be (1) only the loan originated by Bank Co ($50 million), or (2) the entire $500 million facility originated by the syndicate lending group?
Analysis
For purposes of its transfer analysis, Bank Co should consider only its $50 million loan to Big Corp as the entire financial asset. Although Bank Co’s loan is part of the overarching syndicated loan agreement between the lenders and Big Corp, only the outlay that Bank Co made to Big Corp, and the amount that Big Corp now owes Bank Co ($50 million) would be recognized as a loan on Bank Co’s balance sheet. Therefore, Bank Co’s loan constitutes the "entire financial asset" that serves as the starting point for Bank Co’s sale accounting analysis of the assignment, including consideration of ASC 860's participating interest guidance. Bank Co’s analysis should not consider the loans made by the other syndicate lenders to Big Corp; the senior-subordinate relationship that exists between those loans and Bank Co’s loan is not relevant, since Bank Co’s loan is considered a standalone entire financial asset.

Examples of distinguishing between the transfer of an entire financial asset and only a portion
Example TS 2-2 illustrates when a transferor may consider an assigned loan to consist of an entire financial asset (rather than only a portion) in instances when the transferor continues to be a creditor under an overarching loan agreement.
EXAMPLE TS 2-2
A/B structure—assigned loan considered an entire financial asset
Bank Co originates a loan to Industrial Corp for $250 million. To expedite the securitization of a portion of the loan at a later date, the lending agreement consists of two notes executed at origination.
  • Note A has a face amount of $150 million and yields 5%
  • Note B has a face amount of $100 million and yields 6%
The interest rate differential is attributable to Note B’s subordination to Note A in the event of default.
Bank Co subsequently assigns Note A to SPE Co for cash. SPE Co is added to the lending agreement as the senior lender; Bank Co remains a party to the agreement, albeit in a subordinated capacity.
Should Bank Co consider the assigned Note A to be an entire financial asset?
Analysis
We believe it would be reasonable for Bank Co to consider Notes A and B to be two separate and distinct loan agreements covered by an overall master credit agreement. This assertion should be supported by a legal analysis affirming that Note A and Note B are separate legal instruments. Accordingly, we believe Note A (and, by extension, Note B) may be considered an entire financial asset.

However, in many A/B loan structures, the different notes will fail to be considered separate financial assets. This depends on the specific facts and circumstances of each transaction, as further illustrated in Example TS 2-3 and Example TS 2-4. 
EXAMPLE TS 2-3
A/B structure with linked notes—assigned loan not considered an entire financial asset
Bank Co originates a loan to Industrial Corp for $200 million. To expedite the securitization of a portion of the loan at a later date, the lending agreement consists of two notes executed at origination.
  • Note A has a face amount of $100 million and yields 5%
  • Note B has a face amount of $100 million and yields 6% (the interest rate differential is attributable to Note B’s subordination to Note A in the event of default)
  • Upon sale of Note A, the rate on Note B resets so that the total interest on both notes remains unchanged. Industrial Corp is contractually obligated to sign the amended notes in order to effect this change.
  • Both notes are secured by the same collateral.

Note A and Note B are separate legal instruments. This assertion is supported by a legal analysis performed by legal counsel.
Bank Co subsequently assigns Note A to SPE Co at par for cash and retains Note B. Based on market interest rates at the time of sale, the interest on Note A resets to 5.1% and, accordingly, the interest rate on Note B decreases to 5.9%. Industrial Corp signs the notes with the amended rates. SPE Co is added to the lending agreement as the senior lender; Bank Co remains a party to the agreement, albeit in a subordinated capacity.
Should Bank Co consider the assigned Note A to be an entire financial asset?
Analysis
No. Rate-reset provisions are typically included in lending arrangements in order to enable the loan originator (the lender) to sell one of the notes at par. These provisions stipulate that the total all-in interest on the aggregated loans does not change (or does not exceed a prespecified total aggregated amount). We believe that in this case, the notes would need to be assessed as components of a broader facility, which is “an entire financial asset,” comprised of two separate legal instruments. This is because the rate-reset provision links the two notes such that the later legal separation is not permitted under ASC 860-10-40-4D. This conclusion is further supported by the requirement of Industrial Corp to sign the amended notes.

Therefore, the sale of Note A would be considered a transfer of a portion of a recognized financial asset. The sale accounting analysis must first consider whether Note A has the attributes of a participating interest. However, due to the subordination of Note B, as well as the non-pro rata allocation of cash flows, Note A would fail to meet the characteristics of a participating interest, and its transfer would be accounted for as a secured borrowing.
EXAMPLE TS 2-4
A/B structure—assigned loan considered a portion of an entire financial asset
Bank Co originates a loan to Industrial Corp for $250 million. To expedite the securitization of a portion of the loan at a later date, the lending agreement consists of two notes executed at origination.
  • Note A has a face amount of $150 million and yields 5%
  • Note B has a face amount of $100 million and yields 6%
The interest rate differential is attributable to Note B’s subordination to Note A in the event of default.
Note B is subsequently replaced by two notes, each having a principal amount of $50 million and yielding 6%. Bank Co assigns one of the new $50 million notes to Hedge Fund Corp, which is added to the lending agreement as a creditor, subordinated to Bank Co (stemming solely from its rights as the holder of Note A).
Should Bank Co consider the assignment of a portion of Note B to Hedge Fund Corp to involve an entire financial asset?
Analysis
Note A and Note B are each considered an entire financial asset for purposes of applying ASC 860, assuming they are legally considered separate instruments. However, Bank Co has assigned only a portion–not the entirety–of Note B to Hedge Fund Corp. Bank Co retains $50 million of Note B. Accordingly, the assignment involves the conveyance of only a portion of Note B, and therefore Bank Co must consider the participating interest guidance in ASC 860 when analyzing its accounting for the transfer.

Different A/B loan structures might include different features. As illustrated in Example TS 2-2, Example TS 2-3, and Example TS 2-4, legal separation and the existence of rate-reset provisions are factors that should be considered when assessing whether each note is a separate financial asset. Other considerations that could be relevant to making the assessment include:
  • Whether the notes existed as separate legal instruments at the origination of the loan
  • The degree of involvement of the borrower in any modifications to the notes upon their transfer
  • Whether the same servicer services the notes, and if so, how the servicer’s fiduciary duties change once the notes are held by different creditors

2.3.1.2 Loan participations

A loan participation conveys an undivided percentage ownership interest in the underlying loan to the participant (transferee). That interest entitles the participant to receive proceeds from the loan (i.e., collections on the loan) consistent with its ownership interest. However, the transferor remains the sole legal owner of the loan. As such, a participation does not convey to the participant a right to directly enforce the provisions of the underlying loan. That right remains with the transferor. The participant has enforceable rights only against the transferor in accordance with the terms of the participation agreement or based on other principles of law.
Transfers in the form of loan participations are considered to involve only a portion of a loan and are therefore subject to the participating interest guidance. However, in limited circumstances, this presumption may be overcome.
Question TS 2-1 discusses the application of this guidance.
Question TS 2-1
An entire financial asset is considered to have been transferred once all portions of the asset have been transferred.
How should the phrase "once all portions have been transferred" be applied? Can this condition be satisfied only once the transferor has conveyed full legal title to the entire underlying financial asset to another party or may this condition be met if the transferor has sold an ownership interest in all of the cash flows from the underlying financial asset to one or more parties (e.g., using participation agreements), but retains legal title to the entire underlying asset?
PwC response
If the "all portions" concept could only be met when accompanied by a conveyance of full legal title to a transferee, the guidance in ASC 860-10-40-4E would arguably be unnecessary. We believe that an entire financial asset can be considered transferred even when the transferor retains legal title to the underlying asset, provided both of the following conditions are met:
  • A 100% ownership interest in the underlying asset’s cash flows has been sold to a third party (or, if there are multiple transferees, a 100% ownership interest in the aggregate)
  • Other than retaining a servicing fee that satisfies the conditions in ASC 860-10-40-6(b)(1), the transferor has no other economic interest in the underlying asset’s cash flows, either directly or indirectly
Our view is that, if these conditions are satisfied, a transferor has effectively transferred the equivalent of an entire financial asset and consideration of the participating interest guidance is not necessary.
Example TS 2-5, Example TS 2-6, and Example TS 2-7 further illustrate this concept.
EXAMPLE TS 2-5
Transfer of interests in a loan–all portions have been transferred condition not satisfied
Bank Co originates a five-year $50 million loan to Industrial Corp on January 3, 20X1. On January 31, Bank Co sells a 50% interest in the loan to Transferee A and a 40% interest to Transferee B using participation agreements. Bank Co remains the legal owner of the loan and retains servicing at an at-market rate. Bank Co deducts its servicing fee from the periodic interest payments received from Industrial Co. Otherwise, Bank Co is obligated to remit 90% of all cash collections received from the loan to the two transferees, and keeps the other 10%.
If an event of default occurs under the loan agreement with Industrial Corp, Transferee A is entitled to receive first any collections or proceeds received on the loan until its participation interest is fully repaid (i.e., Transferee A’s right to cash flows from the loan become senior to the interests held by Transferee B and Bank Co).
How should Bank Co account for the transfers to Transferee A and Transferee B?
Analysis
Since Bank Co retains a 10% ownership interest in its loan to Industrial Corp, it cannot assert that "all portions" of the loan were transferred. When evaluating the appropriate accounting for the interests sold to the two transferees, Bank Co must first evaluate whether those interests have the characteristics of a participating interest.
Because the participation sold to Transferee A is senior to the interests owned by Transferee B and Bank Co in the event of Industrial Corp’s bankruptcy or default, the pari passu condition of a participating interest is not satisfied. As such, Bank Co must report the two transfers as secured borrowings.

EXAMPLE TS 2-6
Transfer of interests in a loan–all portions have been transferred
Bank Co originates a five-year $50 million loan to Industrial Corp on January 3, 20X1. On January 31, Bank Co sells a 50% interest in the loan to Transferee A and a 40% interest to Transferee B using participation agreements. On February 28, Bank Co sells the remaining 10% interest in its loan to Industrial Corp to Transferee C through a participation agreement for a cash payment of $5 million. After this exchange, Bank Co has no involvement with the loan (or with any of the interests sold) other than as the loan’s legal owner and servicer. Servicing is performed at an at-market rate.
If an event of default occurs under the loan agreement with Industrial Corp, Transferee A is entitled to receive first any collections or proceeds received on the loan until its participation interest is fully repaid (i.e., Transferee A’s right to cash flows from the loan is senior to the interests held by Transferee B and Transferee C).
Does the transaction with Transferee C on February 28 impact the accounting for the transfers of participations to Transferee A and Transferee B?
Analysis
Yes. As a result of the transaction with Transferee C, Bank Co has sold a collective 100% ownership interest in the loan to the three participants. For purposes of the ASC 860 derecognition analysis, Bank Co may consider "all portions" of the underlying loan to have been transferred as of February 28.
On a standalone basis, the three participations sold do not satisfy the criteria to be participating interests. However, since Bank Co has transferred all portions of the loan, it is not required to further consider the participating interest criteria. Consistent with the guidance in ASC 860-10-40-4E, Bank Co should perform a sale accounting analysis upon the transfer of its final 10% ownership interest to Transferee C.
ASC 860-10-40-4E indicates that the sale requirements are to be applied to the entire financial asset presumably establishing that as the appropriate unit of account. However, the legal structure of the transfer was accomplished using participation agreements. This raises the question of how the requirements in ASC 860-10-40-5 should be applied. In these fact patterns, we believe for Bank Co to achieve sale accounting, all of the three participations must satisfy the derecognition criteria in ASC 860-10-40-5. To illustrate, assume that Bank Co’s transfer of the senior interest to Transferee A does not meet the legal isolation criterion in ASC 860-10-40-5 so that one of the transferred participations does not qualify for sale accounting. Accordingly, Bank Co cannot assert that all of the transferred portions satisfies the conditions for sale accounting. As a consequence, Bank Co would continue to recognize the entire financial asset on its balance sheet and account for each transferred participation as a secured borrowing.

This conclusion is consistent with ASC 860’s principle that the unit of account is the entire financial asset and an entity may not account for a transfer partially as a sale and partially as a secured borrowing.
EXAMPLE TS 2-7
Transfer of interests in a loan–all portions have not been transferred
Bank Co originates a five-year $50 million loan to Industrial Corp on January 3, 20X1. On January 31, Bank Co sells a 50% interest in the loan to Transferee A and a 40% interest to Transferee B using participation agreements. On February 28, Bank Co sells the remaining 10% interest in its loan to Industrial Corp to Transferee C through a participation agreement for a cash payment of $3 million. In addition, Transferee C pays $2 million additional consideration consisting of a credit-linked note executed between the parties. The note obligates Transferee C to remit to Bank Co certain amounts it receives from its participation interest in Bank Co’s loan to Industrial Corp. The note is nonrecourse; the only source of repayment is from collections that Transferee C receives from its participation with Bank Co.
Can Bank Co assert that it has transferred "all portions" of the Industrial Corp loan to the three transferees?
Analysis
As a legal matter, Bank Co has sold a 100% ownership interest in the proceeds (collections) from its loan to Industrial Corp through the three participation agreements. However, through its note with Transferee C, Bank Co continues to have an indirect economic interest in its loan to Industrial Corp. If the loan to Industrial Corp were to become worthless, so too would the note from Transferee C, thus exposing Bank Co to loss. In our view, to meet the "all portions have been transferred" condition in ASC 860-10-40-4E, a transferor may not retain any economic interest in, or exposure to, the cash flows generated by underlying entire financial asset (either directly or indirectly) other than that arising from a servicing fee.

Example TS 2-8 and Example TS 2-9 illustrate how a transferor’s contingent obligation to fund a make-whole payment to a transferee should be evaluated when identifying the unit of account under ASC 860.
EXAMPLE TS 2-8
Transfer of 50% interest in a loan–consideration of transferor’s make-whole obligation
On July 1, Bank Co sells to Transferee A, for cash, a 50% interest in a $100 million loan previously made to Manufacturing Corp. Transferee A and Bank Co participate equally in cash collections received on the loan on a pari passu basis. However, the participation agreement obligates Bank Co to make a limited make-whole payment to Transferee A in the event that Manufacturing Corp prepays its loan at any point during the first two years of its term. Bank Co will augment the prepayment penalty that Manufacturing Corp must pay in accordance with the underlying loan agreement.
How should Bank Co account for the transfer to Transferee A?
Analysis
Bank Co retains 50% of the loan’s cash flows. As such, Bank Co cannot assert that "all portions" of its loan to Manufacturing Corp have been sold. Bank Co must evaluate whether the participation sold to Transferee A meets the definition of a participating interest.

As discussed in TS 2.4, the make-whole provision is inconsistent with the attributes of a participating interest; therefore, Bank Co and Transferee A would each report the participation agreement as a secured borrowing.
EXAMPLE TS 2-9
Transfer of 100% interest in a loan–consideration of transferor’s make-whole obligation
On July 1, Bank Co sells to Transferee A, for cash, a 50% interest in a $100 million loan previously made to Manufacturing Corp. Transferee A and Bank Co participate equally in cash collections received on the loan on a pari passu basis. However, the participation agreement obligates Bank Co to make a limited make-whole payment to Transferee A in the event that Manufacturing Corp prepays its loan at any point during the first two years of its term. Bank Co will augment the prepayment penalty that Manufacturing Corp must pay in accordance with the underlying loan agreement.
On August 1, Bank Co sells to Transferee B, for cash, its remaining 50% ownership interest in the loan with Manufacturing Corp. No make-whole arrangements exist in the participation agreement executed between Bank Co and Transferee B; Bank Co is obligated simply to remit to Transferee B 50% of any prepayment penalty paid by Manufacturing Corp in accordance with the loan agreement.
How should Bank Co analyze the transfer of its 50% ownership interest in the loan to Transferee B, and what are the implications of that transfer on Bank Co’s accounting for its participation agreement with Transferee A?
Analysis
As a result of the participation agreements executed with Transferee A and Transferee B, as of August 1 Bank Co no longer has any economic interest in the cash flows from its loan to Manufacturing Corp. The participation agreements, viewed together, obligate Bank Co to remit all of the cash collections from the loan to the two transferees. Bank Co has transferred "all portions" of the underlying loan to the two transferees. Consistent with the guidance in ASC 860-10-40-4E, Bank Co should perform its sale accounting analysis as of August 1st by applying guidance in ASC 860-10-40-5 to the entire financial asset using the approach noted in Example TS 2-6.
The make-whole arrangement with Transferee A should not jeopardize Bank Co’s determination that all portions of the loan to Manufacturing Corp have been transferred. The make-whole simply obligates Bank Co to supplement, in limited circumstances, the portion of the prepayment penalty paid by Manufacturing Corp that Bank Co must remit to Transferee A. The arrangement does not require Bank Co to make a payment to Transferee A in the event that Manufacturing Corp fails to pay interest and principal when due. Similarly, the make-whole does not entitle Bank Co to keep any portion of any prepayment penalty paid by Manufacturing Corp, as Bank Co has sold a 100% ownership interest in all cash inflows from the loan. The make-whole arrangement would need to be considered by Bank Co in its evaluation of the condition in ASC 860-10-40-5.
This example did not stipulate a servicing fee arrangement. However, the conclusion reached would not change were Bank Co to charge the two participants a servicing fee provided the fee approximates a market rate and is not structured to provide credit support to the two investors.

2.3.2 Transfers consisting of multiple advances or draws

ASC 860-10-55-17H provides implementation guidance to assist a transferor in evaluating whether a transfer of a loan consisting of multiple advances to the borrower is subject to the participating interest rules.

ASC 860-10-55-17H

If multiple advances are made to one borrower in accordance with a single contract (such as a line of credit, credit card loan, or a construction loan), an advance on that contract would be a separate unit of account if the advance retains its identity, does not become part of a larger loan balance, and is transferred in its entirety. However, if the transferor transfers an advance in its entirety and the advance loses its identity and becomes part of a larger loan balance, the transfer would be eligible for sale accounting only if the transfer of the advance does not result in the transferor retaining any interest in the larger balance or if the transfer results in the transferor’s interest in the larger balance meeting the definition of a participating interest. Similarly, if the transferor transfers an interest in an advance that has lost its identity, the interest must be a participating interest in the larger balance to be eligible for sale accounting.

An advance "retains its identity" and "does not become part of a larger loan" when the billing statements (and other similar documents) sent to the borrower separately itemize each advance and any payment made by the debtor clearly indicates which advance the payment is intended to settle. Detailed record-keeping must be maintained by the lender for these conditions to be satisfied.
When the borrower’s payment is applied (credited) against only the all-in amount owed, with no attribution or allocation of that payment against specific draws or charges included in that balance, each advance or charge has lost its identity, even if the billing statement enumerates all current charges against the borrower’s account (advances, interest and other fees). In these circumstances, the borrower’s entire unpaid balance should be the unit of account.
Assuming that an advance retains its identity, its transfer by the originator may be considered to involve an entire financial asset if the conveyance is in the form of an assignment (and as a consequence, the transferee becomes a legal creditor of the borrower) and no changes in the assigned loan’s terms are made in connection with the transfer.
If the entire loan is the unit of account, any transfer of a portion should be analyzed using the participating interest guidance. It has been our experience that, when the loan’s current balance consists of multiple advances or draws that have lost their identity, transfers of a portion of the loan (or the transfer of an interest in a pool of such loans) are frequently executed using participation agreements, thus necessitating consideration of the participating interest rules.
Example TS 2-10 and Example TS 2-11 illustrate the application of this guidance to specific fact patterns.
EXAMPLE TS 2-10
Transfer of multiple receivables by the same obligor
ABC Corp produces and sells equipment to industrial clients. It has long-term relationships with its clients and typically sells equipment to each client over extended periods of time, generating revenue from multiple, distinct transactions.
ABC Corp sets up a new program to sell its receivables on a rolling basis to a bank in exchange for cash. The receivables are sold on an invoice-by-invoice basis (i.e., the bank has discretion whether or not to purchase each invoice), and each invoice is sold in its entirety. ABC Corp continues to service the sold receivables at an at-market rate.
Each receivable is tracked on an individual basis, and ABC Corp is capable of tracking payments received from a client to a specific invoice.
Are the sold receivables considered entire financial assets, or should they be assessed under the participating interest guidance?
Analysis
ABC Corp should assess whether the receivables retain their identity, do not become part of a larger loan balance, and are transferred in their entirety. The fact that each receivable is tracked on an individual basis, and that ABC Corp is capable of tracking payments received from a client to a specific invoice, helps ABC Corp support the assertion that each invoice is a separate financial asset. Hence, ABC Corp concludes that the factoring arrangement is for transfer of a group of entire financial assets, that does not need to be assessed under the participating interest guidance.

EXAMPLE TS 2-11
Transfer of certain receivables only
DEF Corp produces and sells manufacturing equipment. To some of its customers, it sells both services and equipment under a single contract. Both services and equipment are sold and billed under monthly payment plans. The monthly invoice details the separate amounts charged for equipment and for services, and the total amount owed. The invoice also includes language describing how payments will be allocated between the equipment and services in case the customer pays less than the entire invoice amount.
DEF Corp enters into a revolving factoring arrangement to sell its equipment receivables to Bank Co. The legal agreement between DEF Corp and Bank Co specifies that full title and ownership of the receivables generated by the equipment sales is transferred to Bank Co. The receivables generated from services are not sold to Bank Co, but retained by DEF Corp.
Are the sold equipment receivables considered entire financial assets, or should they be assessed under the participating interest guidance?
Analysis
DEF Corp should assess whether the equipment receivables retain their identity, do not become part of a larger loan balance, and are transferred in their entirety. The fact that the customer invoice details the separate amounts billed for equipment and services, and the allocation mechanism between them, helps DEF Corp support the assertion that the equipment receivables retain their identity and are separate from the services receivables. Hence, DEF Corp concludes that the equipment receivables factoring agreement is for transfer of a group of entire financial assets that does not need to be assessed under the participating interest guidance.

2.3.3 Transfers involving leases

A lessor may sell its rights to direct financing or sales-type lease receivables from a lessee, as well as a guaranteed residual value, to a third-party investor or securitization entity. As discussed in TS 1, these types of receivables are recognized financial assets. Transfers involving lease-related financial assets sometimes will require consideration of the participating interest rules in ASC 860.
Question TS 2-2 discusses the unit of account for purposes of applying ASC 860 when evaluating transfers of lease-related financial assets.
Question TS 2-2
When evaluating transfers involving lease-related financial assets, what should the lessor-transferor consider when evaluating whether the transfer consists of a conveyance of only a portion of those assets? That is, how should the lessor-transferor identify the unit of analysis for purposes of applying ASC 860?
PwC response
If a sales-type or direct financing lease entitles the lessor to both lease payments and a guaranteed residual value, the unit of account (for purposes of applying ASC 860) depends on whether the residual value is guaranteed by the lessee or by a third-party guarantor. In our view, if the lessee guarantees the residual value, the lease payments and guaranteed residual value should be viewed as a single unit of account. In these circumstances, if the transferee receives other than an entire ownership interest in both components of the lease, the conveyed portion must meet the participating interest rules to potentially qualify for sale accounting.
On the other hand, we believe that third-party guaranteed residual values may be treated as a separate unit of account when evaluating whether a transfer of sales type or direct financing lease receivables involves only a portion of those receivables and, if so, whether the transfer satisfies the conditions of a participating interest. We believe ASC 860-10-40-4D supports this view.
Since an unguaranteed residual value is not considered a financial asset subject to the guidance in ASC 860, the analysis of a transfer of a portion of a lease’s minimum lease payments should not consider the unguaranteed residual value when applying the participating interest rules.
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