IP No. 30 Issue Paper
IP 30–14
Isolation beyond the Reach of the Transferor and Its Creditors
23. The nature and extent of supporting evidence required for an assertion in financial
statements that transferred financial assets have been isolated—put presumptively beyond the
reach of the transferor and its creditors, either by a single transaction or a series of transactions
taken as a whole—depend on the facts and circumstances. All available evidence that either
supports or questions an assertion shall be considered. That consideration includes making
judgments about whether the contract or circumstances permit the transferor to revoke the
transfer. It also may include making judgments about the kind of bankruptcy or other receivership
into which a transferor or special-purpose entity might be placed, whether a transfer of financial
assets would likely be deemed a true sale at law, whether the transferor is affiliated with the
transferee, and other factors pertinent under applicable law. Derecognition of transferred assets
is appropriate only if the available evidence provides reasonable assurance that the transferred
assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the
transferor or any of its affiliates, except for an affiliate that is a qualifying special-purpose entity
designed to make remote the possibility that it would enter bankruptcy or other receivership
(paragraph 57.c.).
24. Whether securitizations isolate transferred assets may depend on such factors as
whether the securitization is accomplished in one step or two steps (paragraphs 54-58). Many
common financial transactions, for example, typical repurchase agreements and securities
lending transactions, isolate transferred assets from the transferor, although they may not meet
the other criteria for surrender of control.
Conditions That Constrain a Transferee
25. Many transferor-imposed or other conditions on a transferee's contractual right to pledge
or exchange a transferred asset constrain a transferee from taking advantage of that right.
However, a transferor's right of first refusal on a bona fide offer from a third party, a requirement
to obtain the transferor's permission to sell or pledge that shall not be unreasonably withheld, or a
prohibition on sale to the transferor's competitor generally does not constrain a transferee from
pledging or exchanging the asset and, therefore, presumptively does not preclude a transfer
containing such a condition from being accounted for as a sale. For example, a prohibition on
sale to the transferor’s competitor would not constrain the transferee if it were able to sell the
transferred assets to a number of other parties; however, it would be a constraint if that
competitor were the only potential willing buyer.
Qualifying Special-Purpose Entity
26. A qualifying special-purpose entity
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must meet both of the following conditions:
a. It is a trust, corporation, or other legal vehicle whose activities are permanently
limited by the legal documents establishing the special-purpose entity to:
(1) Holding title to transferred financial assets
(2) Issuing beneficial interests (If some of the beneficial interests are in the
form of debt securities or equity securities, the transfer of assets is a
securitization.)
(3) Collecting cash proceeds from assets held, reinvesting proceeds in
financial instruments pending distribution to holders of beneficial
interests, and otherwise servicing the assets held
(4) Distributing proceeds to the holders of its beneficial interests.
b. It has standing at law distinct from the transferor. Having standing at law
depends in part on the nature of the special-purpose entity. For example,
generally, under U.S. law, if a transferor of assets to a special-purpose trust
holds all of the beneficial interests, it can unilaterally dissolve the trust and
thereby reassume control over the individual assets held in the trust, and the
transferor "can effectively assign his interest and his creditors can reach it."
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