Relating to securitisation
1. "Originated loans" replaced by "loans and receivables"
The classification of financial assets into 4: originated loans, hold to maturity investments, available-for-sale assets and trading assets has been changed by revising the definition of "originated loans" into "loans and receivables". Under the earlier text, the buyer of a loan could not have classed the investment in "originated loan" category. The definition of "loans and receivables" provides that "an interest acquired in a pool of assets that are not loans orreceivables (for example, an interest in a mutual fund or a similar fund) is not a loan or receivable". By implication, an interest in a pool of loans, for example, in a securitisation transaction, particularly of the pass-through nature, may be classified as "loans and receivables"
2. The major accounting consequence of securitisation is de-recognition, that is, off-balance sheet accounting. Gain-on-sale follows de-recognition.
There are some conceptual changes in the approach to de-recognition, which, in actual implementation, might amount to major changes.
§ First, the accounting standard tries to achieve a synthesis of the risk-rewards approach and the surrender of control approach. Notably, the risk-rewards approach has not been the basis of securitisation accounting under the US standards. Under the revised IAS 39, there are four possible situations:
- If there is no transfer of risks and rewards, there is no de-recognition at all.
- If there is transfer of all the risks and rewards, there is de-recognition, no questions asked. Quite obviously, transfers where there is full recourse against the transferor will not qualify for de-recognition.
- If there is retention of some risks and rewards, then comes the surrender of control approach. In other words, in cases where substantially all the risks and rewards are retained, there will be no de-recognition even if the control has been surrendered.
- In cases where the control has not been surrendered, that is, the asset does not qualify for de-recognition, the asset is continued to the extent of the "continuing involvement" of the transferring entity. Continuing involvement, in simple terms, would mean the continuing financial exposure of the transferor. In sum, the asset may be partially derecognised to the extent the transferor does not have a financial exposure. The continuing involvement approach is substantially similar to the "linked presentation" approach under the UK standard, except that it is applied only to a part of the transferred asset.
§ A set of new conditions has been introduced for fractional transfers. Earlier, de-recognition was possible for either the whole of a financial asset or its part. Now, in case of fractional or partial transfers, a de-recognition can be done only if it relates either an identifiable part of a financial asset, for example, interest in a series of loan payments, or a proportional share of a whole financial asset (say, 10% of loan receivables), or proportional share of an identifiable part. By interpretation, if an entity retains, for instance, all the interest above a particular rate, say 5%, it is not a case likely to qualify for partial de-recognition, as the retained interest is not a proportionate share of the interest flows.
3. Legal true sales would no more be necessary to achieve de-recognition. This would be a major change from the existing approach. The new concept of "transfer of a financial asset" includes situations where the entity would continue to be entitled to the cash flows from the financial asset, but would be obligated to pay the same in satisfaction of an obligation. Though the Implementation Guidance has put an example of a beneficial interest issued at SPV level, properly structured "secured loan" structures of securitisation might easily qualify for off-balance sheet treatment under this approach.