FAR 51 - Transfer and Servicing of Financial Assets Flashcards Preview

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Flashcards in FAR 51 - Transfer and Servicing of Financial Assets Deck (36):
1

Which of the following statements concerning the transfer of financial assets that qualifies as a sale is/are correct?

I. The transferor may retain an interest in the asset transferred.
II. The transferor may recognize a gain or a loss on the transfer.
III. The transferor's proceeds are decreased by any liability it incurs in the transfer.

All 3 are correct.

2

T/F: When the transfer of the financial asset does not meet the requirements of surrender of control by the transferor, the transfer is a borrowing with collateral by the transferor and a secured lending by the transferee.

True
(not a sale and purchase, respectively)

3

Will a transferor have to allocate the carrying value of a financial asset when the transferor retains an interest in the transferred asset or when the transferor does not retain an interest in the transferred asset?

Yes or No -
Interest Retained, No interest retained

Yes, No
The transferor will have to allocate the carrying value of a financial asset when it is transferred and the transferor retains an interest in the asset, but allocation of the carrying value is not necessary when the transferor does not retain an interest in the asset. When no interest is retained, the full carrying value of the asset will be written off by the transferor.

4

Bigco, Inc. transferred long-term receivables with a carrying value of $500,000 and a fair value of $450,000 to Banco for $425,000 cash. Of the $450,000 fair value, $45,000 is attributable to collection of future fees and penalties, which Bigco will retain. The surrender of control requirements have been met, therefore the transfer qualifies as a sale. What amount of loss should Bigco recognize at the time of the transfer?

$25,000
The resulting loss is carrying value transferred $450,000 - cash received $425,000 = $25,000 loss.
Bigco's loss is the difference between the carrying value of the portion of the asset transferred and the cash received for the transferred portion. In this case, the total carrying value of $500,000 must be allocated between the portion of the asset surrendered and the portion retained, based on relative fair values.

5

For accounting purposes, which one of the following circumstances would not be considered the transfer of a financial asset?
A. The transfer of accounts receivable to a factor for cash.
B. The transfer of a bond investment to another unrelated investor for cash.
C. The transfer of a bond investment upon maturity to the issuing entity for cash.
D. The transfer of a stock investment to another unrelated investor for cash.

C. The transfer of a bond investment to the issuing entity upon maturity of the bond would not be considered the transfer of a financial asset for accounting purposes. Because the bond is being transferred to the entity that issued the financial asset (at the time the bond matures), it is not considered a transfer of a financial asset for accounting purposes.

6

On February 1, Rayco transferred a bond it owned with a maturity value of $50,000 to Dayco as security for a short-term loan from Dayco. By terms of the agreement, Dayco cannot resell or otherwise use the bond except as collateral for its loan to Rayco. Rayco defaulted on its repayment of the loan from Dayco on August 1 when the bond had a fair value of $48,000. On what date and in what amount should Dayco recognize the bonds on its books?

August 1, for $48,000
Since the transfer of the bond is used only as security for the loan, and not as a sale of the bond, Dayco would not recognize the bond on its books at the time of the transfer. The bond would be recognized on Dayco's books on the date Rayco defaulted and at its fair value at that time.

7

For accounting purposes, which one of the following is not a characteristic associated with the transfer of financial assets?
A. If the transferor has surrendered control, the transfer can be a sale.
B. The transferred asset may consist of multiple components, some for which control has been surrendered and others for which control has not been relinquished.
C. If the transferor has not surrendered control, the transfer is a secured borrowing.
D. When a financial asset is transferred, the entire asset must be treated either as sold or not sold (i.e., retained).

D. When a financial asset is transferred, the entire asset does not have to be treated as either sold or not sold. The transferred asset may consist of two or more components, with control surrendered for one or more component(s) and control not surrendered for one or more other component(s). If the transferor has surrendered control over a component, the transfer of that component is accounted for as a sale; if the transferor has not surrendered control over a component, the transfer of that component is accounted for as a secured borrowing.

8

T/F: For a financial asset, certain "components" may be treated as sold by the transferor and certain "components" retained by the transferor.

True

9

T/F: If certain components of a financial asset are correctly treated by the transferor as sold, those components should be removed from the transferor's balance sheet.

True
and any retained components by the transferor should remain on the BS of the transferor

10

T/F: If the transfer of a financial asset is treated as a sale of part of (a component of) the asset with the transferor retaining an interest in another part (component) of the asset, the transferor's carrying value of the asset must be allocated between the component sold and the component retained.

True

11

T/F: When the transfer of a financial asset is treated as a secured borrowing, the transferor must write off the asset transferred.

False.
The asset was not sold and should not be written off.

12

T/F: When the transfer of a financial asset is treated as a secured borrowing and the transferor has not defaulted on the borrowing, the transferee will recognize the transferred asset on its books.

False.
As long as the transferor does not default on the borrowing, the transferee is not able to recognize the transferred asset on its books as control has not been given up by the transferor.

13

On January 2, 20X8, Fiserveco acquired a five-year right to service mortgage contracts for which it paid $120,000. Fiserveco estimated that servicing and other fees would generate $400,000 over the five-year period. During 20X8 the contract generated $100,000 in revenues. Which one of the following is the amount of expense, if any, that Fiseerveco should recognize in 20X8 as amortization of its servicing asset?

$30,000
Since Fiserveco acquired the servicing rights asset in the market, it should recognize a servicing asset at its fair value, which is the cost to Fiserveco in the market. Therefore, it should recognize an asset of $120,000 on January 2, 20X8. That servicing asset should be amortized each period over the life of the contract in the same proportion that period revenues have to expected total revenues. During 20X8, $100,000 of an expected $400,000 total revenues was earned. Therefore, $100,000/$400,000, or ¼ of the servicing asset should be amortized. One-fourth of $120,000 = $30,000, the correct answer.

14

On January 2, 20X8, Fiserveco acquired a five-year right to service mortgage contracts for which it paid $120,000. Fiserveco estimated that servicing and other fees would generate $400,000 over the five-year period. During 20X8, the contract generated $100,000 in revenues. Which one of the following is the amount, if any, that Fiserveco should recognize as an asset on January 2, 20X8?

$120,000
Since Fiserveco acquired the servicing rights asset in the market, it should recognize a servicing asset at its fair value, which is the cost to Fiserveco in the market. Therefore, it should recognize an asset of $120,000 on January 2, 20X8.

15

Recognized servicing assets should be assessed for impairment and servicing liabilities should be assessed for understatement. In which of the following cases will an impairment loss be recognized?
A. Servicing asset with carrying value less than fair value.
B. Servicing asset with fair value greater than carrying value.
C. Servicing liability with carrying value less than fair value.
D. Servicing liability with fair value less than carrying value.

C. When a liability has a carrying value less than fair value, an unrealized loss exists. Adjusting the carrying value of the liability to the higher fair value will result in a loss; DR: Impairment Loss (+), CR: Liability (+).

16

Which of the following is not a characteristic associated with the servicing of financial assets?
A. The servicing function is inherent in all financial assets.
B. The right to service financial assets can result in either a separate asset or a separate liability.
C. If a servicing asset is retained as a component in a sale of a financial asset, the servicing asset is measured as a portion of the carrying value of the transferred asset.
D. If a servicing asset is acquired in the market, the servicing asset is measured at fair value.

C. When a servicing asset is retained as a component in a sale of a financial asset, the servicing asset is not measured as a portion of the carrying value of the transferred asset, but rather at fair value at the date of transfer of the financial asset.

17

T/F: Recognized servicing liabilities should be amortized in proportion to and over the period of estimated net loss.

True

18

T/F: If the separate servicing of a financial asset is expected to have an estimated cost of providing the servicing that is more than the expected revenue to be generated, a servicing liability should be recognized.

True.
If more revenue is generated than the estimated cost, a servicing asset should be recognized.

19

T/F: Recognized servicing assets should be amortized on a straight-line basis.

False.
Recognized servicing assets should be amortized in proportion to and over the period of estimated net income.

20

T/F: The transferor of assets pledged as collateral must disclose the pledged assets.

True

21

T/F: Servicing of a financial asset will constitute a distinct asset or liability if contractually separated from the underlying asset.

True

22

Assume a creditor releases a debtor from being primarily responsible for a liability because an unrelated third-party legally assumes the liability, with the original debtor becoming secondarily liable for the obligation. Which of the following statements is correct?

I. The original debtor's liability has been extinguished.
II. The original debtor became a guarantor of the liability.
III. The original debtor may recognize a gain or loss on its release from the obligation.

All 3. The original debtor's liability has been extinguished, the debtor has become a guarantor of the liability now held by a third-party, and the original debtor may recognize a gain or loss on its release from the obligation.

23

Sloco has a debt with a carrying value of $500,000 due to Topco. Because Topco is concerned about Sloco's on-going ability to meet its debt obligation, it has agreed to Sloco's proposal that Trico, an unrelated third-party, assume the debt, with Sloco becoming secondarily liable. Sloco will transfer to Trico equipment with a current fair value of $400,000 in exchange for Trico's assumption of its debt to Topco. Based on its objective assessment as to Trico's likelihood of satisfying the debt obligation, Sloco estimates the possibility of its secondary obligation for the debt has a fair value of $70,000.

What amount of gain or loss, if any, should Sloco recognize as a consequence of carrying out its arrangement with Topco and Trico?

$30,000
Sloco would recognize a gain or loss as the difference between the carrying value of its debt and the fair value of consideration given to extinguish the debt, less any obligation incurred in the arrangement. Therefore, Sloco would write off the carrying value of its debt ($500,000) and the fair value of the equipment conveyed to Trico ($400,000) for a gross gain of $100,000. That gross gain would be reduced by the guarantor obligation it would recognize of $70,000. Thus, Sloco would recognize a net gain of $100,000 - $70,000 = $30,000.

24

T/F: A debtor can be legally released from its liability by either a court order or by agreement of the creditor.

True
court order (e.g., in bankruptcy)

25

Under which of the following conditions would a debtor be justified in writing off a recognized liability?

I. The debtor is relieved from being the primary obligator by the creditor.
II. The debtor is relieved from being the primary obligator by a court ruling.

Both I and II. A debtor may write off a recognized liability if relieved from being the primary obligator by a court or if the debtor is relieved from being the primary obligator by the creditor (or if the debtor pays the creditor).

26

In which of the following circumstances would a debt liability likely not be considered extinguished?
A. Debtor pays cash to fully satisfy the debt and cancels the debt instrument.
B. Debtor creates and fully funds an irrevocable trust to satisfy all obligations of the debt as they become due.
C. Debtor pays cash to fully satisfy the debt and holds the debt instrument in its treasury.
D. Debtor performs services for the creditor that fully satisfy the debt and cancels the debt instrument.

B. Creating and funding an irrevocable trust to satisfy all obligation of the debt, called an in-substance defeasance, would not cause the debt to be extinguished. Debt is extinguished only if the debtor pays the creditor or is legally released from the debt by the creditor or the law/courts.

27

T/F: An in-substance defeasance arrangement qualifies as an extinguishment of the debt.

False. An in-substance defeasance, would not cause the debt to be extinguished. Debt is extinguished only if the debtor pays the creditor or is legally released from the debt by the creditor or the law/courts.

28

T/F: When debt is extinguished through the repurchase of that debt, it will result in a gain or loss that should be recognized.

True

29

T/F: A debtor entity may write-off a liability if it is released from being the primary obligator by the creditor.

True

30

T/F: A debtor entity may write-off a liability if it pays the creditor and is relieved of the obligation.

True

31

Under IFRS, which is true concerning servicing rights?
A. Servicing rights are a new separate asset, distinct from the transferred financial asset.
B. Servicing rights are financial assets that can be measured at amortized cost or fair value.
C. There is specific guidance for servicing rights, as financial assets, under IFRS.
D. Servicing rights retained in the transfer of a financial asset are considered to be a retained interest in the transferred asset, not a new separate asset, with value allocated as a portion of the carrying value of the entire financial asset before transfer.

D.

32

Which of the following conditions must be met for de-recognition of a transferred financial asset to occur under IFRS?

I. The financial asset has been transferred outside the consolidated group of the transferor.
II. The transferor has transferred substantially all of the risks and rewards of ownership of the financial asset.
III. The contractual rights to the financial assets cash flows cannot be retained by the transferor, but must be transferred to the transferee.

Both I and II. IFRS has a two-step process in determining whether de-recognition results from a transfer of assets. Both I and II are required to be met for de-recognition to occur.

III. is required under US GAAP, but not under IFRS.

33

T/F: Under IFRS, financial assets are derecognized when the entity loses control of the contractual benefits that comprise the financial asset.

True

34

T/F: The requirements to determine when a transfer of a financial asset would result in de-recognition are the same under IFRS and U.S. GAAP.

False.
IFRS has a two-step process in determining de-recognition, whereas US GAAP has a three-step process.

35

T/F: Under U.S. GAAP, de-recognition of financial assets is assessed at the entity level, while under IFRS it is assessed at the consolidated level.

True

36

T/F: Under IFRS, separate servicing rights are considered a separate financial instrument, similar to U.S. GAAP.

False.
IFRS does not consider servicing rights to be a separate financial instrument as it is under US GAAP, Instead serving rights retained in the transfer of a financial asset is considered as a retained interest in the transferred asset.

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