FAR - Specific Transactions, Events, & Disclosures - Accounting for Transfers

Question 1

Transfer of financial assets

Answer 1

convey noncash financial asset by an entity to another entity (cannot transfer to issuing entity/itself)

EX:

• factoring/transfer receivables
• securitization of loans
• repurchase agreements

Question 2

Transferring/servicing financial assets

• underlying concepts (3)

Answer 2

1) control determination - has control been surrendered?
2) financial-component concept - financial assets can be separated
3) participating interest concept - ownership relationship between entities and a financial asset

Question 3

Participating Interest Concept

3 items

Answer 3

1) proportional ownership of entire financial asset
2) CFs allocated based on % ownership

3) CFs allocated such that:
- same priorities/no interest is undermined

Question 4

Surrender of control criteria

Answer 4

occurs only if:

• transferred asset has been isolated
• transferred has right to pledge/exchange the asset
• transferor don’t maintain control of asset through agreement

Question 5

Transfer terminology (5)

Answer 5

interest only strip - right to receive some/all interest due to interest bearing asset (bond/loan)

cleanup call - option to service to purchase all transferred assets when amount of outstanding assets fall below a certain level

securitization - financial assets transformed into securities

wash sales - same asset is purchased soon after the sale of the asset

factoring - discount A/R on a nonrecourse, notification basis

Question 6

Acct for transfer of financial assets

surrender of control

Surrender of control (component)

surrender of control not met

Answer 6

requirements:
1) surrender of control of asset = sale of asset

2) surrender of control of component:
a) components are participating interest = sale of asset
b) components not participating interest = secured borrowing

3) Surrender of control (entire asset) NOT MET -> secured borrowing

Question 7

Acct for transfer of financial asset

• sale/secured borrowing - transferor

Answer 7

• derecognize transferred asset qualified as sale
• carry on B/S any retained interest in transferred asset
• allocate CV of asset between proportion transferred and portion retained, based on relative FV - if retained interest is portion of transferred asset
• recognizes any asset/liab resulting from transfer

Question 8

Transfer as sale acct

Transferor

Answer 8

transferor will:

1) write off sold asset
2) write on/recognize consideration rec’d/liab incurred @ FV
3) recognize G/L in current income

Question 9

Transfer as sale acct

Transferee

Answer 9

• recognize asset rec’d @ FV
• measure all assets/liab @ FV
• DONT RECOGNIZE GAINS/LOSSES

Question 10

Transfer as secured borrowing

general

Answer 10

transferred financial asset serves as collateral

acct depends on:

1) whether/not receiving party has right to sell/repledge collateral
2) whether/not (debtor) has defaulted

Question 11

Transfer as secured borrowing

Transferor acct

Answer 11

1) not defaulted
- asset stays on books, not recognized by transferee

2) not defaulted, but transferee has right to sell/repledge asset
- asset stays on transferor’s books as separate “security pledge”

3) defaulted
- trasferee recognizes asset/transferor writes off asset

Question 12

Transfer as secured borrowing

Transferee acct

Answer 12

1) transferor not defaulted
- transferee doesn’t recognize asset, stays on transferor’s books

2) transferor has not defaulted, transferee can/does sell or repledge asset
- transferee recognizes proceeds rec’d and liab to transferor

Question 13

what conditions is the transfer of a financial asset treated as a secured borrowing with the pledge of collateral?

Answer 13

treated as a secured borrowing with pledge of collateral when either:

• criteria for surrender of control are not met;

OR

-portion (component) of a financial asset that is not a participating interest is transferred.

Question 14

true/false

If surrender of control of the transferred asset has not occurred, the transfer will be treated as a secured borrowing by the transferor and a lending with collateral by the transferee.

Answer 14

true

Question 15

true/false

the transferor’s proceeds from the transfer are decreased by any liability incurred in the transfer

Answer 15

true

Question 16

true/false

transferor will have to allocate the carrying value of a financial asset when it is transferred and the transferor retains an interest in the asset, but allocation of the carrying value is not necessary when the transferor does not retain an interest in the asset. When no interest is retained, the full carrying value of the asset will be written off by the transferor

Answer 16

true

Question 17

Servicing of financial assets

Examples

Answer 17

1) collecting principal, interest, fees, etc.
2) paying taxes, insurance, other obligations
3) performing acct, etc.

*servicing function inherent in all financial assets

Question 18

Servicing financial assets

Distinction

Answer 18

servicing becomes distinct asset/liab when separated from underlying asset by:

1) sale of asset w/serviced rights retained
2) separate purchase of servicing rights

Question 19

Recognizing Servicing of financial asset

Answer 19

1) servicing asset = revenues > cost, @ FV

2) servicing liab = revenues

Question 20

Liab Extinguishment Requirements

Answer 20

debtor writes off liab if/only if extinguished by:

1) debtor pays creditor/relieved of obligation

2) debtor legally released from being primary obligator by
a) creditor
b) law/courts

Question 21

In-substance defeasance

Not extinguishment

Answer 21

In-substance defeasance (arrangement in which):

• company places purchased securities in irrevocable trust
• pledges them for future principal/interest payments on its LTD

IF company retains obligation:

• NO EXTINGUISHMENT

Question 22

Determining/Recording Gain/Loss for Acct for Extinguishment

Answer 22

Financial Statement Adj. Items:

1) bond reacquisition items to be accounted for:

• bond issue costs
• unamortized disc/prem
• difference between bond’s Face value & reacquisition amt

2) Gain/Loss = Reacquisition price - Net CV

Question 23

Acct for extinguishment

Reacquisition Price

Net CV

Answer 23

shown as % of Bond Face Value

EX: $100,000 @ 103% or 96%

Net CV =bond face value + unamort premium - unamort disc.

Question 24

debtor is released as being primarily responsible for a liability but becomes secondarily responsible for the liability, what should be its accounting related to that change?

Answer 24

1) Derecognize original liab/consideration paid for release;
2) Recognize @ FV any liab associated w/being secondarily liable for obligation;
3) Recognize gain/loss as difference between original liab written off/consideration paid plus FV of secondary liab

Question 25

true/false

Creating and funding an irrevocable trust to satisfy all obligation of the debt, called an insubstance defeasance, would not cause the debt to be extinguished. Debt is extinguished only if the debtor pays the creditor or is legally released from the debt by the creditor

Answer 25

true

Question 26

US GAAP vs IFRS

Acct for Extinguishment

Surrender control - IFRS

Derecog of asset - IFRS

Answer 26

IFRS:

1) derecognize financial asset when all risks/rewards transferred (dont recognize if substantially retained)
2) if all risks/rewards neither transferred/retained, determine retained control:
- if not, derecognize transferred asset/recognize asset or liab for any right or obligation created/retained
- if so, contrinue to recognize asset to extent of involvement

Question 27

GAAP v IFRS

Extinguishment

Determine transfer as sale/borrowing for consolidation

Answer 27

Determination of transfer as sale/borrowing for consolidation

GAAP:
determine before consolidation @ entity level

IFRS:
Determine after consolidation @ consolidated level

Question 28

GAAP v IFRS

Extinguishment

Servicing rights

Answer 28

GAAP:

1) Servicing rights recog/measurment:
- recognize retained right as new distinct asset
- measure @ FV

2) Servicing rights post recog treat.
- servicing right = financial asset
- measured @ amortized cost or FV

IFRS:

1) Servicing rights recog/measuremnt
- right retained in transfer recognized as retained interest
- measure portion of transfered asset CV based on FV
- not recog as new asset/not measured @ FV

2) Servicing post recog
- servicing right = NOT financial asset
- no guidance for post-recog treat.