Transfers and Servicing of Financial Assets (Portfolio 5184)

Bloomberg BNA Tax and Accounting Portfolio No. 5184, Transfers and Servicing of Financial Assets, explains how to characterize and treat transfers of financial assets and how to account for servicing assets and servicing liabilities. To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial. 

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Description

Bloomberg BNA Tax and Accounting Portfolio No. 5184, Transfers and Servicing of Financial Assets, explains how to characterize and treat transfers of financial assets and how to account for servicing assets and servicing liabilities.

Both U.S. GAAP and IFRS have complex rules on whether a transfer of a financial asset is actually a sale or whether it in essence is a secured borrowing. This issue arises because often the transferrer of a financial asset will transfer only a portion of a financial asset or will continue to remain involved even after transferring a financial asset in its entirety. There are strict rules on when a transferor can treat the partial transfer of a financial asset as a sale. There are also numerous rules on what type of continuing involvement a transferor may have with a transferred financial asset and still have the transfer qualify as a sale. This Portfolio explains the rules for characterizing transfers as either sales or secured borrowings.

If a transaction is a sale, the transferor derecognizes the asset and reports any resulting gain or loss. Special rules exist on computing the gain or loss when the transferor transfers only a portion of a financial asset. There also are special rules for recognizing a transfer that is characterized as a secured borrowing. This Portfolio explains the rules on accounting for both sale and secured borrowing transactions.

Lastly, this Portfolio explains how to account for servicing rights. Often, when selling a financial asset that is a debt obligation, the transferor will retain the rights to service the asset and will receive servicing fees in return. The transferor must determine whether the servicing rights constitute a servicing asset (because the fees will more than adequately compensate it for servicing the financial asset) or a servicing liability (because the fees will not adequately compensate it).

This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio No. 5184, Rood, Transfers and Servicing of Financial Assets (Accounting Policy and Practice Series).

Authors

Joan L. Rood

Joan L. Rood, BBA (Accounting), Stetson University; JD, University of Florida; LL.M. (Tax), Georgetown University. Joan Rood, in her capacity as a counsel attorney with Buchanan, Ingersoll & Rooney, P.C. in Washington, D.C., provides editorial services to Bloomberg BNA's Financial Accounting Resource Center. After many years as a tax attorney, Joan joined this editorial team in 2007, and her sole focus since then has been on delivering detailed, high-quality technical accounting material to Bloomberg BNA subscribers. Prior to joining Buchanan, Joan worked in the Washington National Tax Office of KPMG LLP, where she focused on IRS Practice, Procedure, and Controversy. Prior to joining KPMG, she served as a Senior Trial Attorney with the IRS Office of Chief Counsel National Office in Washington, D.C., where she focused on tax accounting issues. Joan has authored numerous articles on both tax and financial accounting over the years.

Table of Contents

Detailed Analysis
I. Scope of Rules Regarding Transfers of Financial Assets
Introductory Material
A. Financial Assets Within the Scope of ASC 860-10
1. Minimum Lease Payments and Guaranteed Residual Values Under Certain Leases
2. Ownership Interests in Subsidiaries
a. Subsidiaries Holding Only Financial Assets
b. Controlling Interests Reported at Fair Value
3. Beneficial Interests
4. Forward Contracts
5. Securitized Stranded Costs
6. Judgments From Litigation
7. Rights to Receive Fees
B. Transfers Within the Scope of ASC 860-10
1. Loan Participations
2. Transfers of Equity Method Investments
3. Transfers of Cost-Method Investments
4. Transfers of Financial Assets in Desecuritization Transactions
5. Dollar-Roll Repurchase Transactions
6. Nonfinancial Derivative Instruments Subject to ASC 815-10
C. Transfers Not Subject to ASC 860-10
1. Nonfinancial Assets
2. Unrecognized Financial Assets
3. Transfers of Custody of Financial Assets
4. Contributions of Financial Assets
5. In Substance Sales of Real Estate
6. Investments by Owners or Distributions to Owners of a Business Entity
7. Nonretirement Post Employment Benefits
8. Leveraged Leases
9. Certain Money-Over-Money and Wrap Lease Transactions
10. Certain Payments to Settle a Loan or Other Receivable
11. Loan Syndications
12. Exchange of Beneficial Interests
D. Unit of Account
1. Entire Financial Asset
2. Participating Interests
a. Proportionate Division of Cash Flows
(1) Compensation for Services
(2) Proceeds From the Transfer of a Participating Interest
(3) Guarantees
(4) Set-Off Rights
b. Priority of Cash Flows
c. Examples
d. Transfers Failing the Participating Interest Criteria
II. Characterizing Transfers of Financial Assets
Introductory Material
A. Consolidation With Transferee
B. Conditions for Treating Transfers as Sales
1. Isolation of Transferred Financial Assets
a. Legal Opinions
(1) True Sale Opinions for Entities Subject to the U.S. Bankruptcy Code
(A) Legal Standard
(B) Overview of Case Law
(2) True Sale Opinions for Entities Subject to FDIC or Other Type of Receivership
(3) Nonconsolidation Opinions
(A) Legal Standard
(B) Overview of Case Law
b. Effect of Transferor's Power to Require Return on Isolation Analysis
c. Securitization Transactions
2. Transferee's Rights to Pledge or Exchange Transferred Financial Asset
a. Continuing Involvement
b. Constraints on Pledging or Exchanging
c. Interaction Between the “Right to Pledge and Exchange” Condition and the “Effective Control” Condition
3. Effective Control
a. Effective Control Through Agreement Obligating Transferor to Repurchase or Redeem
b. Effective Control Through Unilateral Ability
(1) Call Options
(2) Put Options
(3) Removal-of-Accounts Provisions
(4) Ability to Dissolve Securitization Entity
III. Accounting for Transfers Characterized as Sales
Introductory Material
A. Accounting by the Transferee
B. Accounting by the Transferor
1. Recognizing the Proceeds
a. Identifying Beneficial Interests Received
(1) Accrued Interest Receivables
(2) Whether a Credit Risk Is Part of a Beneficial Interest
b. Servicing Assets and Liabilities
c. Forward Contracts in Revolving-Period Securitizations
2. Determining Gain/Loss and Carrying Amounts
a. Transfer of a Bond Purchased at a Premium
b. Transfer of Lease Financing Receivables
c. Revolving-Period Receivables
d. Transaction Costs in a Sale
3. Examples
C. Rerecognizing Previously Transferred Assets Upon Regaining Effective Control Over Them
D. Subsequent Measurement of Proceeds From Sale Transactions
1. Beneficial Interests
a. Determining Whether Beneficial Interest Is a Derivative
b. Subsequent Measurement of Nonderivative Beneficial Interests
(1) Subsequent Measurement Under ASC 320-10
(2) Recognition of Interest Income Under ASC 325-40
(A) Beneficial Interest Within the Scope of ASC 325-40
(B) Determining Interest Income From a Beneficial Interest
(3) Recognition of Impairment Loss Under ASC 325-40
c. Presentation of Beneficial Interests
2. Sale Proceeds That Are Not Beneficial Interests
a. Financial Asset Denominated in a Foreign Currency
b. Note for Which the Repayment Amount Is Indexed to the Creditworthiness of a Party Other Than the Issuer
c. Loans Near Maturity Date
d. Residual Tranche in a Securitization
IV. Accounting for Transfers Characterized as Secured Borrowings
V. Application of ASC 860-10 to Specific Transactions
A. Securities Lending Transactions and Repurchase Agreements
1. Generally
2. Repurchase-to-Maturity Transactions
3. Dollar-Roll Repurchase Agreements
B. Repurchase Financings
1. Post ASU 2014-11 Rules
2. Pre ASU 2014-11 Rules
C. Wash Sales
D. Options Embedded in Transferred Marketable Securities
1. Transfer of Security Is a Sale
2. Transfer of Security Is a Secured Borrowing
E. Transfers of Receivables
F. Loan Participations
G. Bankers Acceptances and Risk Participations in Them
H. Transfer of Bad-Debt Recovery Rights
VI. Servicing Assets and Liabilities
Introductory Material
A. Recognizing Servicing Assets and Liabilities
1. Distinguishing Servicing From an Interest-Only Strip
2. Revolving-Period Securitizations
3. Regaining Control of Financial Assets Sold
B. Measuring Servicing Assets and Servicing Liabilities
1. Determining the Adequacy of Compensation
2. Subsequent Measurement
a. Determining Classes
b. Change in Classification
c. Impairment Testing
d. Obligation to Service Refinanced Mortgage Loans
C. Subservicing Contracts
D. Disposing of Servicing Assets and Servicing Liabilities
1. Sales of Servicing Rights With a Subservicing Contract
2. Sales of Servicing Rights for Participation in an Income Stream
E. Presenting Mortgage Servicing Assets and Liabilities
VII. Disclosure Requirements Under ASC 860
Introductory Material
A. Disclosure Objectives
B. Disclosing Sale Transactions
1. Disclosures for Each Income Statement Presented
a. Characteristics of the Transfer
b. Cash Flows
2. Disclosures for Each Statement of Financial Position Presented
a. Disclosing Securitizations, Asset-Backed Financing Arrangements, and Similar Transfers
b. Disclosing Transactions That Are Economically Similar to Repurchase Agreements
3. Disclosing Sales of Loans and Trade Receivables
C. Disclosing Secured Borrowing Transactions
1. General Disclosure Requirements
2. Additional Disclosure Requirements for Repurchase Agreements, Securities Lending Transactions, and Repurchase-to-Maturity Transactions
D. SEC Disclosure Rules Regarding Repurchase and Reverse Repurchase Agreements
E. Disclosing Mortgage Servicing Rights
1. All Servicing Assets and Servicing Liabilities
2. Servicing Assets and Servicing Liabilities Subsequently Measured at Fair Value
3. Servicing Assets and Servicing Liabilities Subsequently Amortized
4. Servicing Assets and Servicing Liabilities for Which Subsequent Measurement at Fair Value Is Elected as of the Beginning of the Fiscal Year
VIII. Financial Assets Within the Scope of IFRS
Introductory Material
A. Scope of Derecognition Rules
B. Identifying the Entities in a Transfer
C. Unit of Account
D. Qualifying Transfers
E. Conditions for Derecognition
1. Transfer of Substantially All Risks and Rewards of Ownership
2. Surrendering of Control
F. Recording a Sale
G. Recording Transfers When the Transferor Retains Substantially All Risks and Rewards of Ownership
H. Recording Transfers When Transferor Does Not Retain Substantially All Risks and Rewards of Ownership but Retains Control
1. Determining the Extent of Continuing Involvement
2. Subsequent Measurement
3. Presentation

Working Papers

TABLE OF WORKSHEETS
Worksheet 1 Flowchart of ASC 860-10 Sale v. Secured Borrowing Analysis
Worksheet 2 Sample Disclosure Concerning Repurchase Agreements
Worksheet 3 Sample Disclosure Concerning Securitization Transactions
Worksheet 4 Sample Disclosure Concerning Securities Lending Agreements
Worksheet 5 Sample Disclosure Concerning Transferred Financial Assets
Worksheet 6 Sample Disclosure Concerning Mortgage Servicing Rights Subsequently Measured at Fair Value
Worksheet 7 Sample Fair Value Hierarchy Disclosure