abhishreshthaa
Abhijeet S
ACCOUNTING ISSUE IN SECURITIZATION
Accounting is a crucial issue in securitization, since one of the prime motivations in securitization is to put assets off the balance sheet. Accounting for securitization is not merely a matter of presentation:
it reflects on the cost, and therefore, the very viability of the securitization option. If it results into putting of assets off the balance sheet, a securitization option does not constrain the existing financial resources of the firm, and therefore, is not an alternative to equity; has much lesser costs.
If it features as a liability on the balance sheet, it competes with other funding options.
Accounting and legal standards must look at substance and not the form of a transaction. If an originator retains no risks or benefits with the sold assets, either directly or indirectly (through a SPV), then the transaction should be treated as a sale and the assets should not appear on the originator’s balance sheet.
There are essentially three accounting issues involved in securitization:
1. Whether the transfer of receivables involved in securitization is a sale?
2. Should asset be retained on books?
3. If it is a sale, the asset in question will go off the books the money raised thereby will stay off the books, and the transfer might result into a gain or loss on sale. Thus, removal of assts treatment is also normally associated with gain-on-sale treatment.
On the other hand, it the transaction is not treated as sale, it will be accounted for at par with a financial liability or secured lending.
Securitization accounting is not necessarily based on risk/reward approach, but rather the transfer of control approach.
In India there is no accounting guideline on the treatment of securitisation transaction. The ICAI has not come up with an AS for securitization.
Accounting is a crucial issue in securitization, since one of the prime motivations in securitization is to put assets off the balance sheet. Accounting for securitization is not merely a matter of presentation:
it reflects on the cost, and therefore, the very viability of the securitization option. If it results into putting of assets off the balance sheet, a securitization option does not constrain the existing financial resources of the firm, and therefore, is not an alternative to equity; has much lesser costs.
If it features as a liability on the balance sheet, it competes with other funding options.
Accounting and legal standards must look at substance and not the form of a transaction. If an originator retains no risks or benefits with the sold assets, either directly or indirectly (through a SPV), then the transaction should be treated as a sale and the assets should not appear on the originator’s balance sheet.
There are essentially three accounting issues involved in securitization:
1. Whether the transfer of receivables involved in securitization is a sale?
2. Should asset be retained on books?
3. If it is a sale, the asset in question will go off the books the money raised thereby will stay off the books, and the transfer might result into a gain or loss on sale. Thus, removal of assts treatment is also normally associated with gain-on-sale treatment.
On the other hand, it the transaction is not treated as sale, it will be accounted for at par with a financial liability or secured lending.
Securitization accounting is not necessarily based on risk/reward approach, but rather the transfer of control approach.
In India there is no accounting guideline on the treatment of securitisation transaction. The ICAI has not come up with an AS for securitization.