Question

1- What do you mean securitization? Is there any accounting disclosures for securitization in the context of Local accounting standards? What are the motivations for and alternatives to securitization? Also, discuss the fair value concept of transferor’s journal entry for a transfer of financial assets in your own words.

Answer 1

Securitization means to mortgage or collateral our assets to borrow the loan or raise the fund from the investor or market. This is also the process through which company merge different assets to issue financial instrument to their investors through which they borrow the loan or raise the fund, while the assets are mortgage and collateral at lower value. The few benefits for securitization process are:

1. To manage the operating expenses

2. To enhance the business activities

3. To enhance the liquidity

One of the best example of securitization is Mortgage Backed Securities. As the Assets is mortgage during this process to borrow the loan. The investor will receive the coupon or interest against the loan given to borrow or invest in company.

There are several accounting standards in different jurisdiction like SFAS 140 as per Financial Accounting Standards Board, USA, IAS 32/IAS 39 as per International Accounting Standards. Also, IFRS 10 is application as per International Financial Reporting Standards for disclosure in financial statements.

The main motivation for investor is to earn interest on the fund lend to the borrower and diversify the portfolio. The motivation for the borrower is to raise the fund to enhance the liquidity and easily manage the operating activities without any impact in credit risk.

There are some alternative of this securitization process such as Assets Backed Securities, Covered Bonds etc.

The journal entries are as follows:

Loan Payable A/c Dr

Loss at Financial Assets at fair value

To Financial Assets at fair value