Access the relevant authoritative literature on accounting for the transfer of financial assets. What conditions must be met for a transfer of receivables to be accounted for as a sale (or in accounting terms, "derecognized")? Explain the meaning of the term without recourse.
Answer: An objective in accounting for transfers of financial assets is for each entity that is a pa1rty to the transaction to recognize only assets it controls and liabilities it has incurred, to derecognize assets only when control has been surrendered, and to derecognize liabilities only when they have been extinguished. Another objective is that recognition of financial assets and liabilities should not be affected by the sequence of transactions that result in their acquisition or incurrence unless the effect of those transactions is to maintain effective control over a transferred financial asset. For example, if a transferor sells financial assets it owns and at the same time writes an at-the-money put option (such as a guarantee or recourse obligation) on those assets, it should recognize the put obligation in the same manner as would another unrelated entity that writes an identical put option on assets it never owned. However, certain agreements to repurchase or redeem transferred assets maintain effective control over those assets and should therefore be accounted for differently than agreements to acquire assets never owned.
To address those issues adequately and consistently, the basis adopted in this Topic is a financial-components approach that focuses on control and recognizes that financial assets and liabilities can be divided into a variety of components. The approach analyzes a transfer of a financial asset by examining the component assets (controlled economic benefits) and liabilities (present obligations for probable future sacrifices of economic benefits) that exist after the transfer. Each party to the transfer recognizes the assets and liabilities that it controls after the transfer and no longer recognizes the assets that were surrendered in the transfer.