Case 04-8 DrugKing This case study involves determining the effects of call options and put options on the accounting for transfers of financial assets under ASC 860, Transfers and Servicing: Overall (ASC 860) (FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (Statement 140)). The specific topics, highlighted in the examples below, include (1) attached call options on specific assets and freestanding call options on specific assets readily obtainable elsewhere, (2) conditional call options on transferred assets, and (3) in-the-money put options on transferred assets. Example 1 DrugKing transfers two financial assets, its investments in the Series A and Series B preferred stock of Tip-Top, to InsureAll, a substantive third party (i.e., the transaction does not involve a qualifying special-purpose entity (QSPE)). The Series A and Series B preferred stock are traded publicly (i.e., they are readily obtainable in the marketplace). DrugKing holds a call option, written by InsureAll, on the Series A preferred stock, which will allow it to repurchase the asset from InsureAll two years after the transfer date. DrugKing attaches a call option directly to the Series B preferred stock that will allow it to repurchase the asset from whoever owns the asset up to two years after the transfer date. Both options have a fixed exercise price. Outside counsel for DrugKing concludes that both transfers isolate the transferred assets (i.e., the assets have been put presumptively beyond the reach of DrugKing and its creditors, even in bankruptcy or other receivership). Example 2 DrugKing transfers a financial asset, its investment in a debt security, to InsureAll, a substantive third party (i.e., the transaction does not involve a QSPE). The asset is traded publicly (i.e., it is readily obtainable in the marketplace).