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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 example below, include conditional call options on transferred assets;

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). DrugKing holds a conditional call that is attached to the asset. This call will permit DrugKing to repurchase the asset if LIBOR ever decreases below 4 percent (LIBOR was 6.5 percent as of the date of transfer).

The option has a fixed exercise price and provides more than a trivial benefit to DrugKing. Outside counsel for DrugKing concludes that the transfer isolates the transferred asset (i.e., the assets have been put presumptively beyond the reach of DrugKing and its creditors, even in bankruptcy or other receivership).

How should DrugKing account for each of the asset transfers in the examples above (i.e., may the asset transfers be accounted for as a sale)?

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