This free, guided checker walks your finance team through the key decision points for ASC 860 Transfers of Financial Assets and Sale Accounting. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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ASC 860-10-40-5 applies sale accounting only to a transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset. Identify the unit of account first: a transfer of a portion must pass the participating interest test before the sale conditions are even evaluated, and items that are not recognized financial assets fall outside the ASC 860 derecognition model entirely (see the scope guidance in ASC 860-10-15).
The arrangement is outside the derecognition guidance in ASC 860-10-40; identify the governing Topic (for example ASC 470-10-25 for sales of future revenues).
Official guidance: FASB Accounting Standards Codification
A transferred portion of a financial asset is eligible for sale evaluation only if it is a participating interest under ASC 860-10-40-6A: a proportionate ownership interest in an entire financial asset, pro rata sharing of all cash flows of the whole asset, equal priority among all holders with no recourse beyond standard representations and warranties, and no right of any party to pledge or exchange the entire asset without the consent of all holders. LIFO participations, interest-only strips, and senior-subordinated splits all fail this test regardless of how the agreement is labeled.
The portion is not a participating interest under ASC 860-10-40-6A; account for the transfer as a secured borrowing under ASC 860-30-25-2. Non-pro-rata cash flow splits fail the participating interest definition in ASC 860-10-40-6A; account for the transfer as a secured borrowing under ASC 860-30-25-2.
Official guidance: FASB Accounting Standards Codification
Legal isolation under ASC 860-10-40-5(a) is a legal judgment made in the context of the transferor's possible bankruptcy or receivership, considering the transferor together with its consolidated affiliates included in the financial statements. The customary evidence is a reasoned true sale opinion from counsel; two-step securitizations also rely on a nonconsolidation opinion for the special-purpose entity. Entities subject to FDIC or other non-bankruptcy receivership regimes evaluate isolation under those regimes instead, and full recourse or excessive seller guarantees can undermine the true sale conclusion.
Condition (a) of ASC 860-10-40-5 is not met; recognize the proceeds as a secured borrowing under ASC 860-30-25-2.
Official guidance: FASB Accounting Standards Codification
Condition (b) of ASC 860-10-40-5 looks through entities whose sole purpose is to engage in securitization or asset-backed financing activities: for those transferees, the test is applied to the third-party holders of the beneficial interests rather than to the entity itself. A constraint fails the condition only if two elements are both present - it limits the holder's practical ability to pledge or exchange, and it provides the transferor with more than a trivial benefit. Document each contractual restriction and evaluate the two elements separately.
Condition (b) of ASC 860-10-40-5 is not met; recognize the proceeds as a secured borrowing under ASC 860-30-25-2.
Official guidance: FASB Accounting Standards Codification
Effective control under ASC 860-10-40-5(c) extends beyond repurchase agreements: a unilateral ability to cause the holder to return specific transferred financial assets, other than through a cleanup call as defined in the ASC 860-10 glossary, precludes sale accounting, as does an agreement that permits the transferee to require repurchase at a price so favorable that exercise is probable. Evaluate removal-of-accounts provisions individually under the implementation guidance in ASC 860-10-55; provisions exercisable only on third-party default or cancellation generally do not preclude sale because the transferor cannot trigger them unilaterally.
The transferor maintains effective control under ASC 860-10-40-5(c); recognize the proceeds as a secured borrowing under ASC 860-30-25-2.
Official guidance: FASB Accounting Standards Codification
An agreement that both entitles and obligates the transferor to repurchase transferred financial assets before their maturity maintains effective control when the assets are the same or substantially the same, the repurchase price is fixed or determinable, and the agreement was entered into contemporaneously with the transfer (ASC 860-10-40-22A through 40-24). Following ASU 2014-11, repurchase-to-maturity transactions are also accounted for as secured borrowings. If effective control is not maintained through the repurchase terms, the transfer must still satisfy all three conditions in ASC 860-10-40-5 to be a sale, so continue through the remaining questions.
Effective control is maintained under ASC 860-10-40-5(c); account for the transaction as a secured borrowing with pledge of collateral under ASC 860-30.
Official guidance: FASB Accounting Standards Codification
Upon completion of a transfer that satisfies all three conditions in ASC 860-10-40-5, the transferor derecognizes the transferred assets, recognizes all assets obtained and liabilities incurred as proceeds initially measured at fair value, and records the resulting gain or loss (ASC 860-20-25-1). Continuing involvement does not preclude sale accounting once the conditions are met, but each element - retained servicing, beneficial interests, recourse - must be identified, measured, and disclosed separately. Inventory every form of continuing involvement before computing the gain or loss.
Derecognize the transferred assets and record the gain or loss on sale under ASC 860-20-25-1. Sale accounting applies; recognize a servicing asset or liability at fair value under ASC 860-50-25-1 and ASC 860-50-30-1. Sale accounting applies; measure the beneficial interests received at fair value as proceeds under ASC 860-20-25-1. Sale accounting applies; recognize the recourse or guarantee obligation at fair value as a reduction of net proceeds under ASC 860-20-25-1.
Official guidance: FASB Accounting Standards Codification
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