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3.2 Control criteria for transfers of financial assets
Publication date: 30 Sep 2020
us Transfers of financial assets guide
To achieve derecognition accounting, transferred financial assets must satisfy the three "surrender of control" conditions cited in ASC 860-10-40-5. ASC 860-10-40-4 frames more generally how a transferor should approach this analysis.
Excerpt from ASC 860-10-40-4
The objective of paragraph 860-10-40-5 and related implementation guidance is to determine whether a transferor and its consolidated affiliates included in the financial statements being presented have surrendered control over transferred financial assets or third-party beneficial interests. This determination:
- Shall first consider whether the transferee would be consolidated by the transferor (for implementation guidance, see paragraph 860-10-55-17D)
- Shall consider the transferor’s continuing involvement in the transferred financial assets
- Requires the use of judgment that shall consider all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer.
With respect to item (b), all continuing involvement by the transferor, its consolidated affiliates included in the financial statements being presented, or its agents shall be considered continuing involvement by the transferor.
Excerpt from ASC 860-10-40-5
A transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the transferor surrenders control over those financial assets shall be accounted for as a sale if and only if all of the following conditions are met:
- Isolation of transferred financial assets…
- Transferee’s rights to pledge or exchange [the transferred assets]...
- Effective control [over the transferred assets is not maintained by the transferor, consolidated affiliates, or its agents]...
If a transfer of a financial asset fails to meet any one of the three criteria in ASC 860-10-40-5, the transferor may not derecognize the asset. In these instances, the transaction should be accounted for as a secured borrowing (see TS 5 for information on secured borrowings). If only a portion of an entire financial asset is transferred, and the transferred portion does not satisfy all of the characteristics of a participating interest, the exchange is also required to be reported as a secured borrowing (see TS 2 for information on participating interests). Therefore, the questions of unit of account and control are central to distinguishing between transfers of financial assets that should be accounted for as sales and those that should be reported as secured borrowings.
Figure TS 3-1 provides a decision tree for applying ASC 860’s sale accounting model.
Figure TS 3-1
Framework for accounting for transfers of financial assets
Framework for accounting for transfers of financial assets
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