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5.1 Accounting for transfers reported as secured borrowings overview
Publication date: 30 Sep 2020
us Transfers of financial assets guide
A transfer of financial assets qualifies for sale accounting if the transferor relinquishes control over the assets; that is, if the transfer meets the derecognition criteria in ASC 860, Transfers and Servicing. If the transferor does not surrender control, the transaction is reported as a secured borrowing. In that case, the transferor is considered to have borrowed cash (or other consideration) in exchange for granting the transferee a security interest in the transferred assets. See Figure TS 3-1 for a decision tree for applying ASC 860.
Transfers accounted for as secured borrowings can take many forms. They range from one-off transactions that do not meet all of the sale accounting requirements (sometimes referred to "failed sales") to routine transfers of securities in the capital markets governed by standardized contracts having terms that, by design, allow the transferor to maintain effective control over the securities. Three of the most common are:
- Repurchase agreements. The transferor sells a financial asset (usually a high-quality fixed-income security) to an entity (transferee) and simultaneously agrees to repurchase the security from the transferee at a future date. The repurchase price is typically the sales price plus an interest factor. For accounting purposes, the transferee is considered a secured lender (the transferred security serves as collateral) and the transferor is considered a borrower of cash.
- Dollar rolls. The transferor sells a mortgage-backed security (MBS) and simultaneously agrees to purchase an MBS from the transferee at a future date that is "substantially the same" as (but not necessarily identical to) the MBS sold. The repurchase price provides a return to the counterparty. For accounting purposes, the transferee is considered a secured lender (the transferred MBS serves as collateral) and the transferor is considered a borrower of cash.
- Securities lending transactions. An owner of securities (typically equities) lends its securities to a third party for a fee. The lender generally requires that the borrower provide collateral in the form of cash, standby letters of credit, or other securities. Many securities lending agreements are open-ended, with no explicit maturity date. Either party may unwind the agreement after first notifying the other, and shortly thereafter the parties re-exchange the borrowed securities and related collateral.
A transfer of financial assets can fail to qualify for derecognition accounting for a variety of reasons. If that happens, the exchange is reported as a secured borrowing. See TS 2 for information on the participating interest provisions in ASC 860 and TS 3 for the application of the sale accounting criteria in ASC 860-10-40-5. This chapter addresses only the application of the secured borrowing accounting guidance in ASC 860-30, Transfers – Secured Borrowings and Collateral, to a transfer of financial assets (or a portion of an asset) that fails to qualify for derecognition under the relevant provisions in ASC 860.
The chapter also provides detailed examples that illustrate the accounting for typical repurchase agreements and securities lending transactions.
Because it is written in the context of the secured borrowing accounting model, much of the guidance in ASC 860-30 uses terms commonly associated with financing transactions. For example:
- A transferor of financial assets is considered an "obligor," "debtor," or "borrower"
- The transferee is referred to as the "secured party"
- Transferred financial assets are considered "noncash collateral"
To be consistent with the terms generally used elsewhere in ASC 860, we refer to the transacting parties as "transferor" and "transferee," and similarly use the term "transferred financial assets," with parenthetical references to the corresponding secured borrowing terminology in ASC 860-30.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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