A transferor of financial assets should consider first whether it is required to consolidate the transferee. ASC 860-10-55-17D provides the following implementation guidance:

If the transferor is required to consolidate the transferee based on applying the relevant provisions in ASC 810, Consolidation, further consideration of ASC 860 is unnecessary, at least in the context of the transferor’s consolidated financial statements, as the transferred assets have not moved beyond the confines of the consolidated reporting group.

For transfers of financial assets between two subsidiaries of a common parent, see TS 3.4.3.

Sometimes a transferee (subsidiary) that has acquired financial assets from its parent must prepare standalone financial statements. In those circumstances, ASC 860-10-55-17D clarifies that the transferee should recognize the acquired assets in its financial statements, unless the transfer has the characteristics of a secured borrowing accompanied by a pledge of collateral.

Question TS 3-1 further discusses situations when a subsidiary/transferee obtains financial assets from its parent.

We believe that the guidance in ASC 860-10-55-17D is intended to provide practical reporting relief in situations when a subsidiary has acquired financial assets from its parent. Absent this relief, one might assert that, under ASC 860's control-based model, financial assets acquired from a parent could rarely be reported other than as secured borrowing arrangements in the subsidiary’s standalone financial statements – since the parent controls the subsidiary and thus, presumably, could unilaterally arrange for the subsidiary/transferee to return the assets. Further, in many instances, it is unlikely that these transfers would meet the legal isolation criterion in ASC 860-10-40-5(a).

Accordingly, we believe that if the form of the transfer, and related contractual terms, are consistent with transactions with third parties customarily reported as a sale, it is appropriate for the subsidiary to report on its balance sheet financial assets acquired from its parent. Indicators that support this reporting treatment include (1) the subsidiary acquires legal title to the asset, (2) consideration received by the parent/transferor equals or closely approximates the transferred asset’s fair value and (3) the absence of any explicit or implied contractual arrangements that entitle or obligate the parent to re-acquire the transferred asset at a fixed or formulaic price. In our view, these conditions, if satisfied, support the assertion that the characteristics of the transfer align with those of a purchase and sale (or contribution) of a financial asset, in contrast to a secured borrowing arrangement.