Securitization Accounting - Deloitte

1 Securitization AccountingTenth edition January 2017 Contents01 What s new since the last edition? 0305 How about some examples? 4902 Who has to consolidate the special purpose entity? 0503 Does my Securitization meet the sale criteria under GAAP? 2404 How do securitizations fare under IFRS? 3409 How do I measure and report fair value information? 8511 How will taxes impact my transaction? 10408 What about the investors? 7510So where is the transparency? 9306 How do you determine gain or loss on sale? 6212 How does Securitization impact banks regulatory capital?

2 11813 What s on the horizon? 13214 Appendix: Contacts 13707 What should I know about mortagage servicing rights? 69 What s new since the last edition?01010405060708091011121314020340 104050607080910111213140203 Clarity continues to forge ahead in the Securitization market and a new landscape is beginning to take shape. Although the industry continues to face unique challenges while navigating through the new terrain, the importance and benefits of the overall Securitization process is beyond continue to live in an exciting time for the Securitization industry.

3 As before, we remain strong in our belief that Accounting will play a significant role in Securitization and remain embedded in its evolving foundation. Therefore, it is our pleasure to share with you this tenth edition of our Securitization Accounting book. Our mission was always to provide a roadmap that covers Accounting , tax, and various regulatory changes impacting Securitization and the overall markets. We feel that we met this goal once again with this new publication and, hopefully, you agree. Some more expansive updates in this edition includes a detailed discussion related to.

4 The latest changes to consolidation guidance and some unique complexities in consolidation analysis and determination Fair value guidance of assets and liabilities, and some structure around market questions related to inconsistencies with typical fair value techniques Regulatory changes and the interplay of such rules to Accounting principlesWhile we continue to cover up-to-date issues, the Financial Accounting Standards Board and International Accounting Standard Board are hard at work with projects that may have a future impact on Securitization .

5 To that, we address some projects that may result in market participants facing challenges for the classification and measurements of financial instruments and impairment of financial assets. Chapter 1: What s new since the last edition? Securitization Accounting will continue to evolve and we will continue to provide a point a view about these changes and participate in valued dialogue with all market hope you find this edition enjoyable and useful (and easy to navigate). All the has to consolidate the special purpose entity?

6 0201040506070809101112131402036010405060 7080910111213140203In Accounting for securitizations, there are two baseline questions to answer: Do I have to consolidate the special purpose entity(ies) involved? Have I sold the transferred assets for Accounting purposes?Both US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) require a reporting entity, as part of the derecognition assessment, to consider whether the transfer includes a transfer to a consolidated subsidiary.

7 Therefore, logically, the first step in determining whether sale Accounting has occurred is to determine if a Securitization entity requires consolidation by the many securitizations involve more than one transfer, and consolidated affiliates often prepare their own separate company financial statements, the consolidation and sale questions will often need to be considered more than once for a transaction. As one might expect, different answers may be appropriate at different stages in the Securitization or for different financial reporting purposes, depending on the facts and Accounting guidance applies?

8 For companies applying GAAP, the consolidation guidance is included in A SC 810, consolidation in particular, the variable interest entity (VIE) subsections. Not all special purpose entities (SPEs) are VIEs, but generally, all Securitization SPEs are VIEs. A VIE does not usually issue equity instruments with voting rights (or other interests with similar rights) with the power to direct the activities of the entity, and often the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional forms of credit enhancement or other financial support.

9 If an entity does not issue voting or similar interests or if the equity investment is insufficient, that entity s activities probably are predetermined or decision-making ability is determined contractually. Because Securitization entities are typically insufficiently capitalized, with little or no true equity for Accounting purposes, and are rarely designed to have a voting equity class possessing the power to direct the activities of the entity, they are generally VIEs. The investments or other interests that will absorb portions of a VIE s expected losses or receive portions of its expected residual returns are called variable interests.

10 In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-02, Amendments to the consolidation Guidance. While the ASU did not introduce any new models, its changes eliminated two of the existing models (FIN 46(R) and EITF 04-5), requiring all legal entities to be evaluated as either a VIE or a voting interest entity. Further, under the ASU, the evaluation of whether a VIE should be consolidated is still based on whether the reporting entity has both (1) power and (2) potentially significant economics.