FASB to Require Fair Value Measurement of Retained Beneficial Interests in Financial Asset Sale
June 2, 2008
On May 21, 2008, the Financial Accounting Standards Board (FASB) met to consider and approve new guidance on FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” regarding whether the beneficial interest retained by a transferor in financial assets after the financial assets have been sold would, or would not, be considered a new financial asset to the transferor. At the meeting, the FASB stated that the beneficial interest that a transferor continues to hold following a sale of financial assets would be considered “proceeds” of the sale (a new financial asset) since it generally has a different set of cash flow and a different risk and rewards profile than the original financial asset. Based upon these different economic characteristics, the FASB determined that the retained beneficial interest should be considered a new financial asset and measured at fair value. In order for the retained interest to be designated as a new financial asset, the transfer must qualify as a sale and the sale must be to an entity that does not consolidate with the transferor.
Under previous guidance, beneficial interests received by a transferor in exchange for a transfer of an entire financial asset to an entity that is not consolidated by the transferor would represent a portion of a transferred financial asset and would have been treated as retained interests and therefore be reported at an allocation of the previous carrying amount. In announcing its decision, the FASB stated that fair value should be used for measuring the retained beneficial interest since having a mixed attribute model, where some assets are measured at fair value and others at allocation of the previous carrying amount, would be confusing. Moreover, using fair value would be consistent with the FASB’s movement toward using fair value as the best measurement attribute for financial assets.
The FASB also considered whether a participating interest in a financial asset that continues to be held by a transferor should be initially measured at its allocated carrying amount or whether it should be deemed a new financial asset. Upon deliberation the FASB held that as there would be no change in the risk profile or cash flows of the financial asset, a participating interest in a transferred financial asset should be initially measured at its allocated carrying amount in accordance with the existing measurement guidance in paragraph 10 of FAS 140.
http://www.fasb.org/board_handouts/05-21-08.pdf