ARTICLE · 23 FEBRUARY 1995
Deconsolidation Of Assets And Liabilities - Defeasance
Over recent years, the banking profession has been confronted with two waves of damage, sovereign risks and real estate, which led them in particular to have recourse to a technique known as "defeasance", which consists generally in transferring doubtful assets to an unconsolidated entity, usually a trust. Thereby, the risks and the potential losses should be transferred to shareholders or any other third party, and accounted for with respect to general accounting principles.
The Banking Regulation Committee ("Comité de la Réglementation Bancaire") defined the accounting treatment, by the seller, of such "defeasance" transactions in its ruling 89.07, dated July 1989. This ruling specifies the conditions to respect in order to see such a transaction as a complete sale, i.e. in order to "account for profit or loss resulting from this transfer, equal to the difference between the selling price and the book value of the defeased assets:
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