Question

According to FASB, the transferor is determind to have surrendered control over the receivables if what 3 conditions are met? If all these conditions are met, the transferor treats the transfer as a _______.

Answer 1

The transferor is deemed to have surrendered control over the receivables per FASB when three conditions are met: legal isolation of assets, transferee's right to pledge or exchange, and transferor's lack of effective control over assets.

Step-by-step explanation:

According to the Financial Accounting Standards Board (FASB), the transferor is determined to have surrendered control over the receivables if three conditions are met:

1. The transferred assets have been isolated from the transferor - legally placed beyond the reach of the transferor and its creditors.
2. The transferees have obtained the right to pledge or exchange the assets they received in the transfer.
3. The transferor does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

If all these conditions are met, the transferor treats the transfer as a sale. When treated as a sale, the transferor derecognizes the receivables from its balance sheet, which often has implications for both the financial statements and any potential regulatory requirements.