Rule 140 applies to Harley-Davidson Inc.'s use of special purpose
entities to sell retail motorcycle loans. Rule 140 governs whether or
not the assets and liabilities of the securitization trusts that
purchase the retail loans from Harley-Davidson Financial Services,
Inc. must be consolidated in the financial statements of
Harley-Davidson Financial Services Inc.
Because Harley-Davidson Financial Services Inc. transfers its interest
in the loans to a qualifying special purpose entity and limits
recourse against Harley-Davidson Financial Services, the
securitization transaction meets the conditions established in Rule
140 for surrendering control over transferred assets. This allows
Harley-Davidson Financial Services to not consolidate the assets and
liabilities of the securitization trusts into its own financial
statements. Furthermore, Harley-Davidson Financial Services is
allowed to recognize a gain on sale upon the transfer of retail loans
to one of the qualifying special purpose entities (the securitization
trusts).
I have provided a link to a summary of Rule 140 below, along with a
link to Harley-Davidson Inc.'s 2003 Annual Report that explains in
detail how the company uses qualifying special purpose entities in
accordance with Rule 140 so that it does not have to consolidate their
assets and liabilities into Harley-Davidson Financial Services'
financial statements.
Sincerely,
Wonko
"This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
Statement provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings.
A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent
that consideration other than beneficial interests in the transferred
assets is received in exchange. The transferor has surrendered control
over transferred assets if and only if all of the following conditions
are met:
a. The transferred assets have been isolated from the transferor-put
presumptively beyond the reach of the transferor and its creditors,
even in bankruptcy or other receivership.
b. Each transferee (or, if the transferee is a qualifying
special-purpose entity (SPE), each holder of its beneficial interests)
has the right to pledge or exchange the assets (or beneficial
interests) it received, and no condition both constrains the
transferee (or holder) from taking advantage of its right to pledge or
exchange and provides more than a trivial benefit to the transferor.
c. The transferor does not maintain effective control over the
transferred assets through either (1) an agreement that both entitles
and obligates the transferor to repurchase or redeem them before their
maturity or (2) the ability to unilaterally cause the holder to return
specific assets, other than through a cleanup call."
"Summary of Statement No. 140" Financial Accounting Standards Board
http://www.fasb.org/st/summary/stsum140.shtml
Please note that all page numbers below refer to the pagination
embedded within the document itself.
"As part of its securitization program, HDFS transfers retail
motorcycle loans to a special purpose bankruptcy-remote wholly-owned
subsidiary. The subsidiary sells the retail loans to a securitization
trust in exchange for the proceeds from asset-backed securities issued
by the securitization trust. The asset-backed securities, usually
notes with various maturities and interest rates, are secured by
future collections of the purchased retail installment loans.
Activities of the securitization trust are limited to acquiring retail
loans,
issuing asset-backed securities and making payments on securities to
investors. Due to the nature of the assets held by the securitization
trust and the limited nature of its activities, the securitization
trusts are considered qualifying special purpose entities (QSPEs) as
defined by Statement of Financial Accounting Standards (SFAS) No. 140,
?Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities?. In accordance with SFAS No. 140,
assets and liabilities of the QSPEs are not
consolidated in the financial statements of HDFS.
HDFS does not guarantee securities issued by the securitization trusts
or projected cash flows from the related loans purchased from HDFS.
Recourse against HDFS related to each securitization transaction is
limited to the respective investment in retained securitization
interests, excluding servicing rights. Total investment in retained
securitization interests at December31, 2003 is $254.4 million. The
securitization trusts have a limited life and generally terminate upon
final distribution of amounts owed to the investors in
the asset-backed securities. See note 3 to the consolidated financial
statements for further discussion of HDFS? securitization program."
(Page 40)
"In connection with securitization transactions, HDFS utilizes
Qualifying Special Purpose Entities (QSPEs) as defined by Statement of
Financial Accounting Standards (SFAS) No. 140, ?Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.? Assets and liabilities of the QSPEs are not consolidated
in the financial statements of the Company. For further discussion of
QSPEs and securitization transactions see ?Finance receivable
securitizations,? below." (Page 51)
"Finance receivable securitizations - HDFS sells retail motorcycle
loans through securitization transactions. Under the terms of
securitization transactions, HDFS sells retail loans to a
securitization trust. The securitization trust issues notes to
investors, with various maturities and interest rates, secured by
future collections of purchased retail loans. The proceeds from the
issuance of the asset-backed securities are utilized by the
securitization trust to purchase retail loans from HDFS." (Page 52)
"Due to the overall structure of the securitization transaction, the
nature of the assets held by the securitization trust and the limited
nature of its activities, the securitization trusts are considered
QSPEs. Accordingly, gain on sale is recognized upon transfer of retail
loans to a QSPE and assets and liabilities of the QSPEs are not
consolidated in the financial statements of HDFS. See Note 3 to the
consolidated financial statements for further discussion of HDFS?
securitization program." (Page 53)
Considerable discussion of Harley-Davidson Financial Services Inc. is
found on pages 60-66.
"Form 10K" Harley-Davidson Inc. (2004)
http://www.shareholder.com/Common/Edgar/793952/1104659-04-7224/04-00.pdf |
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