ASC 860 legal isolation criterion for sale of participation under MSLP
FINANCIAL REPORTING INSIGHTS |
In a September 11, 2020 phone call with the American Bankers Association (ABA), RSM and other accounting firms, the SEC Office of the Chief Accountant (OCA) indicated it would not object to the conclusion reached in an August 2020 ABA request for interpretive guidance on the application of the legal isolation criterion under Topic 860, “Transfers and Servicing,” of the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) for transfers of participating interests in loans originated under the Main Street Lending Program (MSLP).
Under the MSLP, a loan participation agreement is executed between (a) an originating financial institution, which sells a 95% participating interest in a qualifying loan and (b) a special purpose vehicle established by The Federal Reserve Bank of Boston (Boston Fed SPV), which buys the participating interest. One important consideration for a financial institution that becomes a party to the participation agreement is the related accounting treatment. The transfer of the 95% participating interest must meet all of the criteria for sale accounting under ASC 860 in order for the transferred portion of the loan to be removed from the financial institution’s balance sheet.
The ABA’s request for interpretive guidance only addresses the legal isolation criterion in ASC 860-10-40-5(a) for sale accounting. This criterion requires that the transferred financial assets have been legally isolated from the transferor – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. ASC 860-10-55-18A indicates that a true sale opinion from an attorney often is required to support a conclusion that transferred assets are isolated from the transferor, any of its consolidated affiliates, and its creditors.
The OCA did not object to the ABA’s conclusion that financial institutions have a reasonable basis to conclude that participating interests sold to the Boston Fed SPV as part of the MSLP meet the legal isolation criterion in ASC 860-10-40-5(a). Therefore, it is not necessary for the financial institution to obtain a true sale opinion. However, given the unique facts and circumstances of the MSLP, this guidance should not be analogized to any other fact patterns or types of transfers. Also, each financial institution must evaluate the other ASC 860 sales criteria, including the criteria in ASC 860-10-40-5(b) and (c) and the characteristics of a participating interest in ASC 860-10-40-6A, before concluding that the transfer of the participating interest can be accounted for as a sale.