FAR - Specific Transactions, Events, & Disclosures - Accounting for Transfers Flashcards
Transfer of financial assets
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
Transferring/servicing financial assets
- underlying concepts (3)
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
Participating Interest Concept
3 items
1) proportional ownership of entire financial asset
2) CFs allocated based on % ownership
3) CFs allocated such that:
- same priorities/no interest is undermined
Surrender of control criteria
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
Transfer terminology (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
Acct for transfer of financial assets
surrender of control
Surrender of control (component)
surrender of control not met
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
Acct for transfer of financial asset
- sale/secured borrowing - transferor
- 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
Transfer as sale acct
Transferor
transferor will:
1) write off sold asset
2) write on/recognize consideration rec’d/liab incurred @ FV
3) recognize G/L in current income
Transfer as sale acct
Transferee
- recognize asset rec’d @ FV
- measure all assets/liab @ FV
- DONT RECOGNIZE GAINS/LOSSES
Transfer as secured borrowing
general
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
Transfer as secured borrowing
Transferor acct
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
Transfer as secured borrowing
Transferee acct
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
what conditions is the transfer of a financial asset treated as a secured borrowing with the pledge of collateral?
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.
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.
true
true/false
the transferor’s proceeds from the transfer are decreased by any liability incurred in the transfer
true
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
true
Servicing of financial assets
Examples
1) collecting principal, interest, fees, etc.
2) paying taxes, insurance, other obligations
3) performing acct, etc.
*servicing function inherent in all financial assets
Servicing financial assets
Distinction
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
Recognizing Servicing of financial asset
1) servicing asset = revenues > cost, @ FV
2) servicing liab = revenues
Liab Extinguishment Requirements
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
In-substance defeasance
Not extinguishment
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
Determining/Recording Gain/Loss for Acct for Extinguishment
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
Acct for extinguishment
Reacquisition Price
Net CV
shown as % of Bond Face Value
EX: $100,000 @ 103% or 96%
Net CV =bond face value + unamort premium - unamort disc.
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?
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
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
true
US GAAP vs IFRS
Acct for Extinguishment
Surrender control - IFRS
Derecog of asset - IFRS
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
GAAP v IFRS
Extinguishment
Determine transfer as sale/borrowing for consolidation
Determination of transfer as sale/borrowing for consolidation
GAAP:
determine before consolidation @ entity level
IFRS:
Determine after consolidation @ consolidated level
GAAP v IFRS
Extinguishment
Servicing rights
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.
