What are “financial assets”?
CFM72380 through CFM72470 explain the definitions of the five types of “securitization company”. The regulations require that the “note issuing company”, the “asset holding company” and the “custodian company”, when holding assets, hold “financial assets”. In Regulation 2 (before the Amending Regulations 2007 – see below and the Amending Regulations 2018 which inserted a new definition of ‘financial asset’ – see CFM72355), the financial asset has the meaning it has for generally accepted accounting purposes, but
- includes derivative contracts as defined for the purposes of Part 7 CTA09
- does not include shares (other than, where applicable, shares of a securitization company that is part of the capital market mechanism in question).
Essentially, “financial assets” in regulation derive their meaning from the definition of a financial asset in paragraph 11 of International Accounting Standard 32, its UK GAAP equivalent in Financial Reporting Standard 25, or paragraph 2 of FRS 13 standard, where applicable. Basically, this will be the contractual right to receive cash or other financial assets. The definition does not exclude instruments removed from the “scope” of IAS 32 by paragraph 4, provided
- they are recognized as assets (and not as liabilities), and
- they are not shares (subject to the very limited exception above).
In addition, a derivative contract that may be out of the money (and therefore recognized as a liability) complies with the rules. (But see the section below on an amendment to this definition.)
For the most part, the regulations will apply to companies involved in the securitization of mortgages, credit cards and similar financial claims. However, the definition of “financial asset” will also encompass other forms of cash receivable. When there is a securitization of payment rights under contracts for the purchase and sale of non-financial items, or of payment rights when the contract as a whole is not a financial instrument, these payment rights which are acquired by a securitization vehicle separately from the rest of the contract will in practice be treated as a financial asset within the meaning of the regulations.
These may include, for example, rights to receive amounts representing consideration for a sale, lease or rental, and rights to collect royalties. While it is theoretically possible that paragraphs 8 to 10 of IAS32 require that they be recognized other than as financial assets, it can be considered that such items are not excluded even though the accounting treatment may be questionable. .
Regulation 2 (2) clarifies that whether an asset is a financial asset is determined when the asset is first acquired, owned or managed. This means that it will be determined by reference to the relevant accounting standards in force at that time. Thus, companies will not exit the regime due to changes in accounting definitions. Where a company agrees to acquire future receivables, it will be treated for the purposes of Regulation 2 (2) as acquiring future receivables on the date of the agreement.
Amended definition of “financial asset”
The 2007 Regulation on the Taxation of Securitization Companies (Amendment) (SI2007 / 3339) amended the definition of a financial asset in the regulation to exclude derivatives on equities or land, and (in general) securities with embedded financial assets. equity or land derivatives (that is to say, in the broad sense, securities convertible or exchangeable into equities, or whose payments are in a way “indexed” to equity values or real estate values.
Global corporate securitizations
A consequence of the “financial assets” rule is that the originator company holding the business assets in an entire corporate securitization (which will often be an SPV formed within the originator group – see CFM72070) will not normally be considered a corporation. securitization, because the assets it holds are unlikely to all be financial assets. However, if the income stream from these assets (but not the assets themselves) is separately allocated to another separate SPV, that income stream may be a financial asset and the latter may therefore be referred to as a “holding company”. ‘active’. See CFM72410 for details.