Under FAS 140, a transferor/originator is considered to have surrendered control
over transferred assets and, therefore, to have sold the assets (to the extent that con-
sideration other than beneficial interests in the transferred assets is received in ex-
change), only if all of the following conditions are met:
- Legal isolation. The transferred assets have been isolated from the
transferor/originator—put presumptively beyond the reach of the
transferor/originator and its creditors, even in bankruptcy or other receivership. - Right to pledge or exchange.Each transferee (or, if the transferee is a QSPE (see
21.5), each holder of its beneficial interests) has the right to pledge or exchange
the assets (or beneficial interests) it received, and no condition both constrains
the transferee (or holder) from taking advantage of its right to pledge or ex-
change and provides more than a trivial benefit to the transferor/originator. - Effective control criteria.The transferor/originator does not maintain effective
control over the transferred assets through either an agreement that both entitles
and obligates the transferor/originator to repurchase or redeem them before their
maturity or the ability to unilaterally cause the holder to return specific assets,
other than through a clean-up call.
Transfers of financial assets in which the transferor/originator has no continuing
involvement with the transferred assets or with the transferee have not been contro-
versial. However, transfers of financial assets often occur whereby the
transferor/originator has some form of continuing involvement either with the assets
that have been transferred or with the transferee. Typical examples of continuing in-
volvement include recourse provisions relating to the assets transferred, servicing
arrangements, and agreements or options to repurchase or reacquire the transferred
assets. Transfers of financial assets with continuing involvement raise questions
about whether the transfers should be accounted for as sales or as secured borrow-
ings. The three criteria above establish the standard for determining when the trans-
fer of financial assets should be considered a sale or as a secured borrowing.
(c) Sale Criteria
(i) Legal Isolation. The facts and circumstances surrounding the transfer of assets
must provide reasonable assurance that the transferred assets would be beyond the
reach of the transferor/originator, or the powers of a bankruptcy trustee or other re-
ceiver (e.g., the Federal Deposit Insurance Corporation for FDIC insured entities or
the SPCE for broker-dealers) for the transferor/originator or any of its affiliates.
Derecognition of transferred assets is appropriate only after all available evidence
that either supports or questions the isolation assertion has been considered and
found to provide reasonable assurance that the transferred assets would be beyond
the reach of the powers of a bankruptcy trustee or other receiver for the
transferor/originator or any of its consolidated affiliates. However, if the trans-
feror/originator has continuing involvement with the transferred assets, the assistance
of legal counsel likely will be required. Typically, a “true sale/nonconsolidation”
opinion is obtained from a bankruptcy attorney. Statement of Auditing Standards No.
73, “Use of Specialist’s Opinion Required in Most Securitization Transactions,” pro-
vides guidance on reviewing the legal opinion and indicates that a “would be” true
21.6 ACCOUNTING 21 • 9