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Statement of Financial Accounting Standards No. 125.

The purpose of this and other SFAS articles is to make you aware of the new SFASs. Also, it is hoped that these articles will provide you with the necessary information to determine which clients, if any, must comply with the new SFASs and the date by which they must comply. Should you think of any clients that might have to comply with this or other SFASs, you should order a copy for your office library's reference section; it's worth the $10-$15 cost.

The Journal of Accountancy prints SFAS standards but not the appendixes. The appendixes are usually the "meat" of the SFAS and include the following information: implementation guidance, background information, the basis of the board's conclusions, amendments to existing pronouncements and a glossary of terms. To use SFAS No. 125 as an example, the actual standard is eight pages (21 paragraphs); the appendixes are another 90 pages (213 paragraphs).

The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standard (SFAS) No. 125: Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125 supersedes and amends a number of FASB's previously issued statements. Also, it mandates that additional disclosures will be made to the financial statements. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application of this Statement is not permitted. The provisions of SFAS No. 125 need not be applied to immaterial items.

The definitions listed below are very helpful in understanding SFAS No. 125 and demonstrate the type of information included in the appendixes:

Financial Asset - Cash, evidence of an ownership interest in an entity or a contract that conveys to a second entity a contractual right (a) to receive cash or another financial instrument from a first entity or (b) to exchange other financial instruments on potentially favorable terms with the first entity.

Financial Liabilities - A contract that imposes on one entity a contractual obligation (a) to deliver cash or another financial instrument to a second entity or (b) to exchange other financial instruments on potentially unfavorable terms with the second entity.

Servicing Asset - A contract to service financial assets under which the estimated future revenues from contractually specified servicing fees, late charges and other ancillary revenue are expected to more than adequately compensate the servicer for performing the service. A contract is either (a) undertaken in conjunction with selling or securitizing the financial assets being serviced or (b) purchased or assumed separately.

Servicing Liabilities - A contract to service financial assets under which estimated future revenues from stated servicing fees, late charges and other ancillary revenue are not expected to adequately compensate the servicer for performing the service.

Transfer - The conveyance of a noncash financial asset by and to someone other than the issuer of that financial asset. Thus, a transfer includes selling a receivable, putting it into a securitization trust or posting it as collateral, but excludes the origination of that receivable, its settlement or its being restructured into a security in a troubled debt restructuring.

In theory, SFAS No. 125 will require a client who sells his or her accounts receivable - with recourse - to a third party, to record a liability. A client who buys mortgages with servicing rights may be required by SFAS No. 125 to record an asset. This statement provides guidance on when to record and remove assets and liabilities from the books. SFAS No. 125 supersedes SFAS No. 76, Extinguishment of Debt, and SFAS No. 77, Reporting by Transferors for Transfers of Receivables with Recourse, clarifying debt security classifications. It also supersedes SFAS No. 122, Accounting for Mortgage Service Rights, Technical Bulletins No. 84-4, In-Substance Defeasance of Debt, No. 85-2, Accounting for Collateralized Mortgage Obligations(CMOs), and No. 87-3, Accounting for Mortgage Servicing Fees and Rights. This statement amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS No. 65, Accounting for Certain Mortgage Banking Activities. This SFAS has an impact on a lot of FASB's statements and technical pronouncements in the mortgage banking area. If your clientele are in the mortgage banking industry, this SFAS is a must for your library. You can order this or any other SFAS by writing:

Order Department Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, Connecticut 06856-5116

The product order code number for SFAS No. 125 is S125.
COPYRIGHT 1996 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996 Gale, Cengage Learning. All rights reserved.

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Author:Reynolds, Briam M.
Publication:The National Public Accountant
Date:Nov 1, 1996
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