ASC 860-30-25-5 prescribes the accounting by the transferor and the transferee for transferred financial assets.

When transferred financial assets are considered noncash collateral subject to the collateral recognition provisions in ASC 860-30, the transferor and transferee should consider the reporting guidance illustrated in the Figure TS 5-2.

Figure TS 5-2
Decision tree for recognition of noncash collateral

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In a typical securities lending transaction, the securities borrower (transferee) provides the lender with cash and/or securities that are contractually characterized as collateral in which the securities lender (transferor) obtains a security interest. Upon the underlying agreement’s termination, the securities lender (transferor) is obligated to return the collateral.

Despite the legal characterization of the consideration received by a securities lender (transferor) as collateral, ASC 860-30-25-7 clarifies that, under the secured borrowing accounting model, the cash and/or securities received are considered the proceeds of a borrowing. See TS 5.7 for information on when the transferor should recognize these proceeds on its balance sheet.

Question TS 5-1, Question TS 5-2, Question TS 5-3, Question TS 5-4, and Question TS 5-5 discuss aspects of this guidance.

The guidance in ASC 860-30 applies to all transfers of financial assets that do not meet the conditions for derecognition in ASC 860-10-40-5. In these circumstances, whether the transferor conveys an ownership interest in underlying asset to the transferee, or only a security interest, is irrelevant. If the transferor has not surrendered control over the financial asset, the exchange is accounted for as a secured borrowing, regardless of the legal form of the conveyance.

ASC 860-10-20 defines collateral as personal or real property in which a security interest has been given. However, ASC 860-30 uses the term "collateral" more broadly than that definition would suggest. That is, if an exchange is accounted for as a secured borrowing, the transferred financial asset is considered collateral for financial accounting purposes even when, as a legal matter, the transferee acquires an ownership interest (as opposed to a security interest) in the transferred asset.

The collateral accounting provisions in ASC 860-30-25 do not apply to cash, or securities that can be sold or pledged for cash, that a transferor has received in exchange for noncash financial assets (e.g., in a securities lending transaction). As discussed in ASC 860-30-25-9, cash or securities that can be sold or pledged for cash are deemed to be proceeds of either a sale or a borrowing.

The securities borrower should continue to report the pledged securities on its balance sheet, as it has not surrendered control over them. Posting securities as collateral constitutes a transfer of financial assets. Accordingly, although ASC 860-30 is silent in this regard, we believe that the securities borrower should evaluate its accounting for these transactions based on applying the derecognition guidance in ASC 860-10-40-5. Under the standard securities lending agreement, the securities borrower may have the right to substitute collateral while the agreement is in effect, and the securities lender is obligated to return the collateral upon the agreement’s termination (which either party can initiate). Given these provisions, the securities borrower maintains effective control over the pledged securities. Derecognition would be inappropriate in these circumstances.

This is one instance under GAAP when the same securities may be reported on the balance sheet of two entities simultaneously. This stems from the fact that, from the perspective of the securities lender, the collateral received is considered the proceeds of a borrowing and is required to be recognized if it can be repledged or sold. ASC 860-30-25-8 is clear in this regard.

The borrower of securities (transferee) is required to provide the disclosures about the pledged collateral in accordance with ASC 860-30-50-1A.

ASC 860-30-25-5(a) requires transferred collateral that the secured party can sell or repledge to be reclassified and reported separately by the transferor. That guidance does not change the transferor’s measurement of the collateral. Because the transferor continues to effectively control the collateral, it should not be derecognized, and should be subject to the same measurement principles in effect prior to the transfer. For example, securities reclassified from the available-for-sale category to securities pledged to creditors should continue to be measured at fair value, with changes in fair value reported in other comprehensive income. Similarly, debt securities reclassified from the held-to-maturity category to securities pledged to creditors should continue to be measured at amortized cost.

ASC 860-30-30-1 indicates that the transferee (secured party) should initially measure the collateral at fair value. However, ASC 860 does not address how the assets should be subsequently measured. We believe that collateral recognized by a transferee should be subsequently measured consistent with its existing accounting policies for similar assets.

If a transferee (secured party) sells collateral pledged to it, it should recognize the proceeds received and a corresponding obligation to return the collateral, as discussed in ASC 860-30-25-5(b). However, ASC 860 itself provides little guidance regarding the transferee’s accounting for the obligation in subsequent periods. In lieu of such guidance, ASC 860-30-35-3 states that the liability to return such collateral should be measured in accordance with other relevant accounting pronouncements. For example, a transferee bank or savings institution that has sold collateral is required to subsequently measure the related liability like a short sale at fair value. ASC 942-405-25-1 and ASC 942-405-35-1 indicate that obligations incurred in short sales should be reported as liabilities and remeasured to fair value through the income statement at each reporting date.