Transfers and Servicing Financial Assets

Question 1

A transfer may be accounted for as a sale only when the transferor surrenders control of the financial assets and meets all of the following criteria:

Answer 1

The transferred financial asset is isolated and beyond reach of transferor or creditors even in bankruptcy.

The transferee can pledge or exchange the assets without unreasonable constraints or conditions.

The transferor does not maintain effective control over the transferred financial asset or third party beneficial interest in the asset.

Question 2

Major types of transfers include?

Answer 2

Securitization: purchase and sale of securities that are collateralized by pool of assets like group of receivables.

Factoring: Selling receivables at a discount to obtain immediate cash

Transfers of receivables with recourse: sell at discount to obtain immediate cash but retain risk of loss if customer does not pay amount owed

Repurchase agreements: Sell financial assets to lender and later repurchase, using asset as collateral for a loan in essence.

Repurchase to Maturity Transaction: Repurchase agreement where the settlement date and maturity date are same, no reacquiring asset.

Loan participants: Group of financial institutions *participating interest holders) purchase a share of a financial instrument.

Banker’s acceptance: Order from a customer of a bank for the payment of a specified sum of money that may be bought and sold.

Question 3

Any beneficial interests received as proceeds in a transfer of an entire financial asset should be recognized at ________ value.

Answer 3

Upon completion of a transfer of a participating interest that satisfies the conditions to be accounted for as a sale, the transferor (seller) shall:

Allocate the previous carrying amount of the entire financial asset between both of the following on the basis of their relative fair values at the date of the transfer:
    The participating interests sold
    The participating interest that continues to be held by the transferor

Question 4

when an entity undertakes an obligation to service financial assets (collecting principal, interest, etc.) it should recognize:

Answer 4

recognition and measurement of servicing assets (total servicing revenue is expected to exceed total servicing costs) or servicing liabilities (total servicing costs are expected to exceed total servicing revenues) when an entity undertakes an obligation to service financial assets.

More than adequate = servicing asset
Adequate = neither
Less than adequate = servicing liability

Question 5

Servicing asset or liability should be recorded at Fair value initially.

Answer 5

Test for impairment at each reporting date. Changes are reporting in earnings in period in which change in fair value occurs.

Question 6

The amortization method requires servicing assets/liabilities to be recorded initially are fair value but then amortized as:

Answer 6

over the period of receipt of estimated net income or loss, for A/L respectively.
At each reporting period end, impairment testing for or increased obligation based on fair value.

Question 7

Servicing of financial assets may include:

Answer 7

Collecting payments
paying taxes and insurance
monitoring delinquencies
foreclosing
investing
remitting fees
accounting

Question 8

If a transfer of a participating interest qualifies as a sale, the transferor should:

Answer 8

Allocate the previous carrying amount of the entire financial asset between both of the following on the basis of their relative fair values at the date of the transfer:

The participating interest(s) sold
The participating interest that continues to be held by the transferor.