...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...
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...Research File Memorandum Prepared by: Accounting Student Client: DrugKing. (The Company) Subject: Accounting for financial asset transfers with related call options and put options Background DrugKing transfers financial assets with related call options or put options to a substantive third party, InsureAll. There are three different security categories involved – preferred stock, debt security, and receivables. The DrugKing transfers its investments in the Series A and Series B preferred stock of Tip-Top to InsureAll. The Series A preferred stock is traded publicly (i.e. readily obtainable in the market place) and DrugKing holds a freestanding call option, written by InsureAll, which will allow it to repurchase the asset from InsureAll two years after the transfer date. The Series B preferred stock is not traded publicly (i.e. not readily obtainable in the market place) as the entire series was held by DrugKing prior to the transfer to InsureAll. The DrugKing attaches a call option directly to the Series B stock that will allow it to repurchase the asset from whoever owns it up to two years after the transfer date. Both options have a fixed exercise price. DrugKing also transfers its investment in a debt security to InsureAll. The asset is traded publicly (i.e. readily obtainable in the market place) and DrugKing holds a conditional call attached to the asset that will permit the DrugKing to repurchase the asset if LIBOR ever decreases below 4% (LIBOR was 6.5%...
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