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For a transfer to qualify for sale accounting, the transferor may not maintain effective control over transferred financial assets. A transferor’s retention of effective control is incompatible with derecognition. Under ASC 860, sale accounting is predicated on the transferor having surrendered control over the financial assets transferred.
ASC 860-10-40-5(c) summarizes those arrangements through which a transferor is considered to retain effective control over transferred financial assets.

ASC 860-10-40-5(c)

The transferor, its consolidated affiliates included in the financial statements being presented, or its agents do not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred assets (see paragraph 860-10-40-22A). A transferor’s effective control over the transferred financial assets includes, but is not limited to, any of the following:

  1. An agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity (see paragraphs 860-10-40-23 through 40-25)
  2. An agreement, other than through a cleanup call (see paragraphs 860-10-40-28 through 40-39), that provides the transferor with both of the following:
    1. The unilateral ability to cause the holder to return specific financial assets
    2. A more-than-trivial-benefit attributable to that ability.
  3. An agreement that permits the transferee to require the transferor to repurchase the transferred financial assets at a price that is so favorable to the transferee that it is probable that the transferee will require the transferor to repurchase them (see paragraph 860-10-55-42D).

A transferor may maintain effective control directly (that is, as a result of a specific contractual provision) or indirectly (that is, through a combination of contractual arrangements that, when considered together, provide effective control). Accordingly, when evaluating this sale accounting criterion, it is important that the transferor consider all forms of continuing involvement with transferred financial assets (including, if applicable, involvements with third-party beneficial interests in those transferred assets). This analysis should also take into account involvements on the part of the transferor’s consolidated affiliates and agents.

3.7.1 Agreements to repurchase or redeem the transferred financial assets

The excerpts below describe the circumstances when a transfer would fail the "effective control" condition in paragraph ASC 860-10-40-5(c) through an agreement of the type described in ASC 860-10-40-5(c)(1). In practice, this guidance applies principally to transfers of financial assets governed by repurchase agreements or securities lending contracts, which are typically reported as secured borrowings.

Excerpt from ASC 860-10-40-24

An agreement that both entitles and obligates the transferor to repurchase or redeem transferred financial assets from the transferee maintains the transferor’s effective control over those assets as described in paragraph 860-10-40-5(c)(1), if all of the following conditions are met:

  1. The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred. To be substantially the same, the financial asset that was transferred and the financial asset that is to be repurchased or redeemed need to have all of the following characteristics:
    1. The same primary obligor (except for debt guaranteed by a sovereign government, central bank, government-sponsored enterprise or agency thereof, in which circumstance the guarantor and the terms of the guarantee must be the same)
    2. Identical form and type so as to provide the same risks and rights
    3. The same maturity (or in the circumstance of mortgage-backed pass-through and pay-through securities, similar remaining weighted-average maturities that result in approximately the same market yield)
    4. Identical contractual interest rates
    5. Similar assets as collateral
    6. The same aggregate unpaid principal amount or principal amounts within accepted good delivery standards for the type of security involved. Participants in the mortgage-backed securities market have established parameters for what is considered acceptable delivery. These specific standards are defined by the Securities Industry and Financial Markets Association and can be found in Uniform Practices for the Clearance and Settlement of Mortgage-Backed Securities and Other Related Securities, which is published by the Securities Industry and Financial Markets Association.
    See paragraph 860-10-55-35 for implementation guidance related to these conditions.
  2. Subparagraph superseded by Accounting Standards Update No. 2011-03.
  3. The agreement is to repurchase or redeem the financial assets before maturity, at a fixed or determinable price.
  4. The agreement is entered into contemporaneously with, or in contemplation of, the transfer.

ASC 860-10-40-24A states that a repurchase-to-maturity transaction, as defined, should be accounted for as a secured borrowing as if the transferor maintains effective control over the underlying financial assets. These transactions are required to be reported as secured borrowing arrangements.
To conclude that a transferred financial asset should be reported as a secured borrowing in accordance with ASC 860-10-40-5(c)(1), the transferor must have both the contractual right and contractual obligation to repurchase financial assets identical to (or substantially the same as) those transferred. Conditional arrangements, or contractual rights involving optionality on the part of the transferor or transferee, are not subject to this guidance. ASC 860-10-40-25 emphasizes this distinction.

ASC 860-10-40-25

With respect to the condition in (a) in paragraph 860-10-40-24 to maintain effective control under the condition in paragraph 860-10-40-5(c) as illustrated in paragraph 860-10-40-5(c)(1), the transferor must have both the contractual right and the contractual obligation to repurchase or redeem financial assets that are identical to those transferred or substantially the same as those concurrently transferred. Transfers that include only the right to reacquire, at the option of the transferor or upon certain conditions, or only the obligation to reacquire, at the option of the transferee or upon certain conditions, may not maintain the transferor's control, because the option might not be exercised or the conditions might not occur. Similarly, expectations of reacquiring the same securities without any contractual commitments (for example, as in wash sales) provide no control over the transferred securities.

See TS 5 for a discussion of the accounting for repurchase agreements, dollar rolls, and securities lending transactions.

3.7.2 Ability to unilaterally cause the return of specific transferred financial assets (call options)

As a general principle, for a transfer of financial assets to potentially qualify for derecognition, a transferor cannot (1) have the unilateral ability to cause the holder to return specific financial assets and (2) derive a more-than-trivial benefit attributable to that ability. This unilateral ability frequently stems from a call option held by the transferor attached to the transferred financial assets or, in other instances, a freestanding call option held by the transferor. In either case, assuming the two conditions are present, the transferor is considered to maintain effective control over the transferred financial assets, and sale accounting would be inappropriate.
Concluding whether a call option (or similar right) held by a transferor allows it to maintain effective control over transferred financial assets sometimes requires judgment. This stems, in part, from the fact that multiple factors may collectively bear on the analysis, including (1) the terms of the option’s strike price (underlying’s fair value, fixed or formulaic), (2) the characteristics of the underlying financial asset (readily obtainable in the market place or not), (3) if not unilaterally exercisable at the transfer date, the circumstances under which the call may be exercised, and (4) other forms of transferor involvement with the transferee or its beneficial interests.
As discussed in TS 3.6.4, a call option on transferred assets, depending on its features, could cause a transfer to fail either the condition in ASC 860-10-40-5(c) if it provides the transferor with effective control as described above, or the condition in ASC 860-10-40-5(b) if it constrains the transferee from pledging or exchanging the asset, or both. Hence, options on the transferred assets should be analyzed to see if they meet the requirements of both conditions.

3.7.2.1 More-than-trivial benefit

The assessment of a right to cause the return of a transferred asset must also consider whether that right provides the transferor with "a more-than-trivial benefit." As discussed in TS 3.6.3, this concept also must be considered when evaluating the "ability to freely pledge or exchange" condition in ASC 860-10-40-5(b). As noted there, the threshold beyond which a benefit is deemed to be "more than trivial" is not defined, but is intended to be a low bar. In practice, it is difficult to demonstrate that a transferor-imposed restriction is not providing a more-than-trivial benefit. We believe that this presumption should also be observed when evaluating whether the terms of a call option provide the transferor with effective control.
An exception to the foregoing presumption is cited in ASC 860-10-40-28(c), which indicates that a call option to reacquire readily-obtainable assets at their current fair value may not provide the transferor with a more-than-trivial benefit. In these instances, additional analysis of the facts and circumstances is required. Conversely, a fixed-price call option held by the transferor that allows it to reacquire specific transferred financial assets should be presumed to provide a more-than-trivial benefit. However, if the call option is so far out of the money that it is probable when the option is written that the transferor will not exercise the call, ASC 860-10-40-28(a) indicates that the transferor does not receive a more-than-trivial benefit from the arrangement—and thus the option does not preclude sale accounting.

3.7.2.2 Effective control indirectly maintained

Concluding whether a call option (or similar arrangement) allows a transferor to maintain effective control sometimes entails consideration of other forms of involvement that a transferor has with the transferred financial assets. For example, as noted above, it may be appropriate to conclude that a fair value call option on transferred financial assets readily obtainable in the marketplace, viewed in isolation, does not provide a transferor with effective control. However, as observed in ASC 860-10-40-35 and discussed further in ASC 860-10-55-42A, this conclusion would be inappropriate if the transferor holds a residual interest in the transferred assets.

ASC 860-10-55-42A

This guidance illustrates the concept in paragraph 860-10-40-35 that a transferor maintains effective control if it has a right to reclaim specific transferred assets by paying fair value and also holds the residual interest in the transferred financial assets. If a transferor holds the residual interest in securitized financial assets and can reclaim the transferred financial assets at termination of the securitization entity by purchasing them in an auction, and thus at what might appear to be fair value, then sale accounting for the transfer of those financial assets it can reclaim would be precluded. Such circumstances provide the transferor with a more-than-trivial benefit and effective control over the financial assets, because it can pay any price it chooses in the auction and recover any excess paid over fair value through its residual interest in the transferred financial assets.

ASC 860-10-40-28A also indicates that, if the transferee is a securitization entity, options attached to beneficial interests may also allow the transferor to maintain effective control, either directly or indirectly, over transferred financial assets:

ASC 860-10-40-28A

Effective control over transferred financial assets can be present even if the right to reclaim is indirect. For example, if a call allows a transferor to buy back the beneficial interests at a fixed price, the transferor may maintain effective control of the financial assets underlying those beneficial interests. If the transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing activities, that entity may be constrained from choosing to pledge or exchange the transferred financial assets. In that circumstance, any call held by the transferor on third-party beneficial interests is effectively an attached call on the transferred financial assets. Depending on the price and other terms of the call, the transferor may maintain effective control over the transferred financial assets.

In summary, to ensure that their impact on the effective control analysis has been fully vetted, call options granted to a transferor in connection with a securitization of transferred financial assets warrant careful analysis. See TS 3.7.2.4 and TS 3.7.2.5 for a discussion of removal-of-account provisions and cleanup calls, arrangements that are frequently found in securitization structures.

3.7.2.3 Embedded call options

ASC 860-10-40-32 clarifies that a call option embedded in a transferred financial asset by its issuer should not be considered to convey effective control to a transferor.

Excerpt from ASC 860-10-40-32

An embedded call option would not result in the transferor’s maintaining effective control because it is the issuer rather than the transferor who holds the call option and the call option does not provide more than a trivial benefit to the transferor. For example, a call embedded by the issuer of a callable bond or the borrower of a prepayable mortgage loan would not provide the transferor with effective control over the transferred financial asset.

Question TS 3-9 illustrates the application of this guidance.
Question TS 3-9
If Company A issues a callable debt instrument to Company B, can Company B obtain sale accounting treatment on a subsequent transfer of the financial instrument with the embedded call option?
PwC response
Yes. Sale accounting would not be precluded for Company B. The call option was embedded by, and is held by, Company A, the issuer of the underlying debt instrument. The call does not cause the transferor (Company B) to maintain effective control because the issuer (Company A), not the transferor, holds the call.
Alternatively, assume Company B transfers financial assets to a securitization trust. The trust issues beneficial interests containing a fixed-price call option that allows Company B to acquire those interests from its holders at any time. In these circumstances, Company B retains effective control over the financial assets held by the trust and, as such, sale accounting would be precluded.

3.7.2.4 Removal-of-accounts provisions

Commonly seen in securitization transactions, removal-of-accounts provisions (ROAPs) allow a transferor to reclaim assets sold to a securitization trust or asset-backed financing entity. The "trigger" events underlying a ROAP that permit a transferor to reclaim transferred financial assets can differ from deal to deal, and terms of these provisions can vary. As a general decision principle, however, a transferor is considered to have maintained effective control if the ROAP allows the transferor to remove specific transferred financial assets at its discretion, or in response to an event within the transferor’s control. ASC 860-10-40-37 cites two examples in this regard.

ASC 860-10-40-37

The following are examples of removal-of-accounts provisions that preclude transfers from being accounted for as sales:

  1. An unconditional removal-of-accounts provision or repurchase agreement that allows the transferor to specify the financial assets that may be removed and that provides a more-than-trivial benefit to the transferor, because such a provision allows the transferor unilaterally to remove specific financial assets
  2. A removal-of-accounts provision conditioned on a transferor’s decision to exit some portion of its business that provides a more-than-trivial benefit to the transferor, because whether it can be triggered by canceling an affinity relationship, spinning off a business segment, or accepting a third party’s bid to purchase a specified (for example, geographic) portion of the transferor’s business, such a provision allows the transferor to unilaterally remove specific financial assets.

On the other hand, if a right to reclaim transferred financial assets is contingent upon a third-party action or an event that is (1) outside the control of the transferor and (2) not certain to occur (e.g., a default by a receivable’s obligor), the transferor is not considered to maintain effective control over the assets subject to that right. As such, the transfer may be accounted for as a sale, provided the other derecognition criteria in ASC 860-10-40-5 are met. ASC 860-10-40-38 cites various examples of ROAPs that do not allow a transferor to maintain effective control at the transfer date:

ASC 860-10-40-38

The following are examples of removal-of-accounts provisions that do not preclude transfers from being accounted for as sales:

  1. A removal-of-accounts provision for random removal of excess financial assets, if the provision is sufficiently limited so that the transferor cannot remove specific transferred financial assets, for example, by limiting removals to the amount of the transferor's interests and to one removal per month
  2. A removal-of-accounts provision for defaulted receivables, because the removal would be allowed only after a third party’s action (default) and could not be caused unilaterally by the transferor.
  3. A removal-of-accounts provision conditioned on a third-party cancellation, or expiration without renewal, of an affinity or private-label arrangement, because the removal would be allowed only after a third party’s action (cancellation) or decision not to act (expiration) and could not be caused unilaterally by the transferor.
  4. A removal-of-accounts provision that does not allow the transferor to unilaterally reclaim specific financial assets from the transferee. For related implementation guidance, see paragraph 860-10-55-41

Once the third-party action or event has occurred that, under the terms of the ROAP, permits a transferor to unilaterally reclaim transferred financial assets, the transferor is considered to have regained effective control over those assets – and thus must recognize them on its balance sheet. Effective control stems from the existence of the transferor’s right to re-acquire specific assets, not from the exercise of those rights. Rerecognition is required at that point – that is, when the ROAP first becomes exercisable – regardless of whether the transferor intends to exercise the ROAP and reclaim the assets. Refer to TS 4.3 for further discussion of the accounting for ROAPs that have become exercisable.
Question TS 3-10 illustrates how to apply this guidance in a specific fact pattern.
Question TS 3-10
Company A retains a par-value call option that allows it to repurchase a group of amortizing transferred loans when the loans’ aggregate principal balance declines to 30% of the balance outstanding at the transfer date, or two years after the transfer, whichever occurs first. Because Company A cannot unilaterally exercise the call option at the transfer date, may it assert that the arrangement should be considered a contingent ROAP that does not impede sale accounting under ASC 860-10-40-5(c)(2)?
PwC response
No. The call option permits Company A to maintain effective control over the transferred group of loans. Although Company A cannot exercise the call until one of the two conditions takes place, either condition is certain to occur in the future. Thus the call does not have the attributes of a contingent arrangement that could allow Company A to assert that it has surrendered effective control at the transfer date. Although a portion of the loans’ aggregate principal balance will have amortized prior to the call becoming exercisable, ASC 860’s derecognition model does not allow a transferor of an entire financial asset to account for the transfer partially as a sale and partially as a secured borrowing. See ASC 860-10-55-68 and ASC 860-10-55-68A.

3.7.2.5 Cleanup calls

ASC 860-10-20 provides the definitions of a cleanup call option and an affiliate.

Definitions from ASC 860-10-20

Cleanup Call Option: An option held by the servicer or its affiliate, which may be the transferor, to purchase the remaining transferred financial assets, or the remaining beneficial interests not held by the transferor, its affiliates, or its agents in an entity (or in a series of beneficial interests in transferred financial assets within an entity) if the amount of outstanding financial assets or beneficial interests falls to a level at which the cost of servicing those assets or beneficial interests becomes burdensome in relation to the benefits of servicing.
Affiliate: A party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity.

The right of a servicer (or an affiliate, including the transferor) to exercise a cleanup call (as defined) is not considered an arrangement that permits the holder to maintain effective control over the financial assets transferred. Therefore, transferred assets subject to a qualifying cleanup call held by a transferor or a consolidated affiliate may qualify for derecognition in financial statements that include the transferor, provided the transfer meets the other sale accounting requirements. Cleanup calls are an exception to the general rule that a call option on transferred financial assets that becomes exercisable solely due to the passage of time maintains effective control.
A cleanup call confers effective control only when it enables the servicer to call more than a de minimis level of outstanding assets or beneficial interests. The de minimis level is deemed to be the level of outstanding assets or beneficial interests below which the cost of servicing those assets or interests becomes "burdensome" in relation to benefits of servicing. The point at which servicing costs become burdensome is not specifically addressed in ASC 860. In practice, however, a cleanup call that first becomes exercisable when the remaining aggregate outstanding principal balance of the serviced loans (or beneficial interests) represents 10% or less of the aggregate principal balance of the loans (or beneficial interests) at the transfer date is generally considered to meet the "burdensome" condition. However, the specific facts and circumstances of a transaction (including the characteristics of the underlying assets) may suggest that the burdensome criterion is first satisfied at a lower (or higher) threshold.
Parties other than the servicer or its affiliates cannot be considered to hold a cleanup call. Only a servicer is impacted when the outstanding assets (or beneficial interests) fall or amortize to a level at which the cost of servicing becomes burdensome (the definition of a cleanup call). Any other party would be motivated by some other incentive in exercising a call. See ASC 860-10-55-42B for more detail on this distinction.
Example TS 3-7 illustrates a cleanup call option held by an affiliated entity.
EXAMPLE TS 3-7
Cleanup call held by affiliated entity
Two subsidiaries (A and B) are each directly owned by Parent Co. Subsidiary A transfers loans to SPE X, a securitization entity that neither Parent Co nor its subsidiaries is required to consolidate. Subsidiary B obtains the servicing rights to the loans. In addition, Subsidiary A has the right to purchase all, but not less than all, of the transferred loans when their outstanding aggregate balance falls below 10% of their aggregate balance at the transfer date. Subsidiary B has determined that its servicing costs become burdensome at the 10% threshold.
For purposes of its standalone financial statements, does the call option held by Subsidiary A affect its sale accounting evaluation of the loans transferred to SPE X?
Analysis
No. As Subsidiary A, the holder of the call, is an affiliate of Subsidiary B, the servicer, and the call is triggered at the same level at which servicing becomes burdensome, the call held by Subsidiary A meets the definition of a cleanup call. Accordingly, for purposes of Subsidiary A’s standalone financial statements, the call would not be an impediment to sale accounting. Similarly, in the consolidated financial statements of Parent Co, the call option would also meet the definition of a cleanup call and would not preclude sale accounting.
If a cleanup call is set at a threshold at which the cost of servicing is not burdensome in relation to the benefits of servicing, the arrangement will not qualify for the cleanup call exception in ASC 860. For example, given the facts above, if servicing became burdensome only when the serviced loan pool declined to 5% of its aggregate principal balance at the transfer date, the option would not qualify as a cleanup call under ASC 860. In this instance, the call option would preclude sale accounting by Subsidiary A — as it would be considered to have maintained effective control over the transferred loans.

3.7.2.6 Summary table and implementation questions

Figure TS 3-4 summarizes how various physically-settled call options held by the transferor to reacquire an entire transferred financial asset or a group of financial assets (or to acquire beneficial interests in those assets) generally would be viewed under paragraph ASC 860-10-40-5(c).
Figure TS 3-4
Evaluation of call options
For purposes of Figure TS 3-4, the call option is presumed to provide more-than-a-trivial benefit.
Type of option
Eligible for sale accounting?
1. Fixed-price call option attached to transferred entire financial assets or to a group of entire transferred financial assets:
On any (all) transferred financial asset(s), and unilaterally exercisable at any time
No, because the transferor can unilaterally cause the holder to return the transferred financial assets and the call’s fixed price provides a more-than-trivial benefit. See ASC 860-10-55-41(a).
On certain specified assets within a group of transferred assets, and the transferor can unilaterally reclaim (call) the specific assets at any time
Specific transferred assets subject to the call option are not eligible for sale accounting, as the transferor maintains effective control over them. However, sale accounting is precluded only for the specified loans subject to the call, not the entire transferred group.
On excess financial assets from a group of transferred financial assets and the transferor cannot unilaterally choose the assets (random removal)
Yes, provided the ability to randomly remove the transferred financial assets is sufficiently limited, and the circumstances giving rise to any such excess are not within the control of the transferor. See ASC 860-10-55-41(b).
On a remaining portion of a transferred financial asset (e.g., when the remaining principal balance of a transferred amortizing loan (or group of transferred loans) reaches 20% of its (or the group’s) unpaid principal balance at the transfer date), and the arrangement does not qualify as a cleanup call.
No, because the option becomes exercisable in response to an event certain to occur (amortization of the underlying loans), and a transfer cannot be accounted for partially as a sale and partially as a secured borrowing. Thus, sale accounting for the entire transferred asset is precluded. See ASC 860-10-55-68 and ASC 860-10-55-68A.
Conditional call option (contingency not within the control of the transferor and not certain to occur)
Yes, but it must be reassessed as an unconditional call option if and when the contingent condition occurs.
2. Unconditional fixed-price call option embedded in transferred entire financial assets or beneficial interests therein:
Embedded by issuer of the asset
Yes, because it is the issuer that holds the call, not the transferor, and thus the call does not provide the transferor with effective control. See ASC 860-10-40-32.
Embedded by a transferor in beneficial interests in transferred financial assets held by third parties
Evaluate whether embedded option allows the transferor to indirectly maintain control. May be considered an attached call on the underlying transferred financial assets in certain instances. See ASC 860-10-40-28A.
3. Unconditional attached call option at fair value on entire financial assets or groups of entire financial assets:
On assets readily obtainable
Possibly yes, as a call at fair value may not convey more-than-a-trivial benefit to a transferor, subject to considering all relevant facts and circumstances, including the commercial rationale for the call. See ASC 860-10-40-28(c).

However, if the transferor holds the residual interest in transferred financial asset that have been securitized, the call is presumed to provide more-than-a-trivial benefit, and sale accounting will be precluded. See ASC 860-10-55-42(b). This conclusion extends to transferred financial assets subject to auction arrangements in which the transferor may participate, as discussed in ASC 860-10-55-42A.
On assets not readily obtainable
No. By providing the transferor with the ability to reacquire financial assets not readily obtainable in the marketplace, the call provides the transferor with more-than-a-trivial benefit.
Question TS 3-11 and Question TS 3-12 address common questions regarding the existence of call options.
Question TS 3-11
Are wash-sale transactions, in which a transferor sells a financial asset for cash and repurchases the same asset shortly thereafter (generally within 15–30 days) at its current fair value, treated as financings under ASC 860?
PwC response
No. ASC 860-10-55-57 clarifies that a wash-sale transaction is to be accounted for as a sale unless the transferor and transferee execute a contract concurrent with the transfer that allows the transferor to repurchase or redeem the transferred financial asset at a later date. In the absence of any such arrangement, the transferor is not considered to maintain effective control over the transferred financial asset, even if it repurchases the asset within a short period of time. Accordingly, the sale criteria in ASC 860-10-40-5 are satisfied in these instances, and derecognition is appropriate.
Considering the short-term nature of the separate sale and purchase transaction and considering ASC 860’s requirements to evaluate all arrangements entered into in contemplation of a transfer, some factors to consider that would support sale accounting for a wash-sale include:
  • Sale and subsequent purchase executed on readily obtainable assets
  • No contemporaneous agreement exists that entitles and obligates the seller to repurchase the readily obtainable financial assets at a later date
  • The sale and subsequent purchase are not executed with the same counterparty
Question TS 3-12
A transferor retains an option to repurchase, at par, a group of transferred loans. The option becomes exercisable 10 years after the transfer date. The contractual maturities of the transferred loans range between 20 and 30 years. How should this option be assessed under ASC 860-10-40-5(c) when evaluating whether the transferor has maintained effective control over the loans?
PwC response
The repurchase option will likely preclude sale treatment under ASC 860-10-40-5(c). Under ASC 860-10-40-5(c)(2), a transferor is considered to maintain effective control over transferred financial assets if there is an agreement that provides the transferor with the unilateral ability to cause the holder to return specific financial assets and provides more-than-a-trivial benefit to the transferor.
Absent the borrowers’ prepayment of the loans (or another maturity event), the option becomes exercisable when the non-call period lapses (i.e., after 10 years). Although there is no implementation guidance in ASC 860 that addresses this specific fact pattern, a similar fact pattern is discussed in ASC 860-10-55-42(c). In that fact pattern, a transferor holds an option that allows it to repurchase a group of transferred assets when the group amortizes to 20% of its value (determined at the transfer date). The arrangement does not meet the conditions to be considered a cleanup call. The guidance asserts that sale accounting is precluded in this instance, as the option allows the transferor to unilaterally cause the return of the transferred group of assets once an event certain to occur takes place – namely, amortization of the loan pool to 20% of its initial value – assuming that the loans have not been prepaid.
We believe that the "passage of time" principle that underlies the guidance in ASC 860-10-55-42(c) is applicable to the fact pattern in this example. As such, the ability of the transferor to repurchase the loans after 10 years would preclude sale accounting at the transfer date. Despite the 10-year non-call period, the transferor is still considered to maintain effective control; exercise of the option is not contingent upon an event that may (or may not) occur.

3.7.3 Transferee can require repurchase at a favorable price

As a general rule, a put option held by (written to) a transferee does not provide the transferor with effective control over the underlying transferred financial asset. An exception to this presumption is described in ASC 860-10-40-5(c)(3) and re-affirmed in ASC 860-10-55-42D(b). According to the guidance in those paragraphs, a transferor is considered to maintain effective control over a transferred financial asset through an agreement that permits the transferee to require the transferor to repurchase the transferred financial asset at a price that is so favorable to the transferee (at the date of the transfer) that it is probable that the transferee will require the transferor to repurchase it. This conclusion is consistent with the decision principle in ASC 860-10-40-4; namely, that all arrangements or agreements made with respect to transferred financial assets must be considered when evaluating whether, in fact, the transferor has surrendered control those assets.

3.7.4 Consideration of agents

Question TS 3-13 further clarifies when the involvement of agents needs to be considered.
Question TS 3-13
A transferor and transferee may have the same decision-maker agent (e.g., each shares the same investment advisor). In these circumstances, when evaluating whether the transferor has surrendered effective control over financial assets sold to the transferee, how should the common agency relationship be considered?
PwC response
When assessing whether it retains effective control over a transferred financial asset, a transferor must consider all continuing involvement by it, its consolidated affiliates included in the financial statements being presented, and its agents. However, ASC 860-10-40-22A clarifies that the transferor needs to consider the involvements of an agent only when the agent acts for and on behalf of the transferor. If the transferor and transferee have the same decision-maker agent, the agent’s activities on behalf of the transferee should not be considered in the transferor’s assessment of effective control.
For example, an investment advisor of an investment company (fund) has a fiduciary responsibility to make investment decisions on behalf of investors that are solely in their best interest. An investment advisor that executes transfers of financial assets between funds under common management is not acting solely on behalf of the transferor, but rather as an agent representing both the transferor and transferee. Consistent with the advisor’s fiduciary obligations to each entity, transfers of financial assets between the two funds must be on terms fair and equitable to both parties. As a result, absent an explicit agreement that entitles or obligates a transferor fund to reacquire the transferred financial assets, we do not believe that the existence of an agent with investment discretion over both the transferor and transferee should lead to a conclusion that the transferor maintains effective control over the transferred assets, stemming from common management.
Note that this conclusion, in addition to aligning with the guidance in ASC 860-10-40-22A, is also consistent with the guidance in ASC 860-10-55-78, which states that the sale accounting analysis of transfers of financial assets involving two subsidiaries should disregard the involvement of their parent.
12 Subsequent references in this section to a transferor also include consolidated affiliates and agents of the transferor.

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Hello and welcome to Viewpoint

Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. Follow along as we demonstrate how to use the site

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