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ASC 860-30-25-2 clarifies when a transfer of financial assets should be accounted for as a secured borrowing.

ASC 860-30-25-2

The transferor and transferee shall account for a transfer as a secured borrowing with pledge of collateral in either of the following circumstances:

  1. If a transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset does not meet the conditions for a sale in paragraph 860-10-40-5
  2. If a transfer of a portion of an entire financial asset does not meet the definition of a participating interest.

The transferor shall continue to report the transferred financial asset in its statement of financial position with no change in the asset’s measurement (that is, basis of accounting).

Even though financial assets may be legally sold to a transferee, if the transfer does not qualify for sale accounting, the exchange must be reported as a borrowing accompanied by a pledge of collateral. At a high level, under the secured borrowing accounting model, the transferor:
  • Recognizes any cash received from the transferee (and any other assets obtained from the transferee that the transferor can pledge or exchange, other than beneficial interests in the transferred assets)
  • Records an obligation (liability) to return the cash to the transferee (and any other recognized assets obtained from the transferee)
  • Continues to apply the appropriate US GAAP to the financial assets transferred, which the transferor continues to recognize on its balance sheet

Under the secured borrowing accounting model, the transferee:
  • Derecognizes any cash paid to the transferor
  • Records a receivable, representing its entitlement to receive at a later date the cash paid to the transferor
  • Does not record the financial assets obtained from the transferor (barring a default by the transferor)

The secured borrowing model maintains financial reporting "symmetry" between the two parties. The transferred assets remain on the books of the transferor, with no corresponding recognition of those assets by the transferee. Similarly, cash exchanged between the parties is recognized and derecognized by its recipient and payer, respectively, along with a corresponding payable and receivable.
The collateral recognition provisions in ASC 860-30 are discussed in TS 5.3. See FSP 22 for information on the presentation and disclosure requirements of ASC 860, including those dealing with collateral.
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