Your bank just sold a 40% participation in a commercial real estate loan to a correspondent bank. The cash is in. The loan officer considers the deal done. Then your accounting team asks a harder question: does the participation qualify as a sale, or does the full loan stay on your balance sheet with a borrowing next to it?
The answer turns on a short paragraph of US GAAP: the definition of a “participating interest” in ASC 860 (Accounting Standards Codification Topic 860, Transfers and Servicing). Banks, auditors and dealers have told the Financial Accounting Standards Board (FASB) for years that the guidance is applied in different ways. On September 16, 2026, FASB agreed and added a project to fix it.
By the end of this post, you’ll know what FASB decided, how the current participating interest criteria work, where practice diverges, the two paths FASB is weighing, and what your bank should do while the project runs.
What did FASB decide at its September 16, 2026 meeting?
At its September 16, 2026 meeting, FASB added a project on Topic 860 to its technical agenda. Its scope is to identify and address diversity in practice in applying the participating interest guidance, which is the rule that decides whether selling part of a loan is a sale or a secured borrowing. Securities-for-securities lending was left out.
Deloitte’s meeting recap confirms the decision, and Centri Consulting’s summary notes the securities lending exclusion. FASB’s technical agenda overview, revised September 24, 2026, names the project “Transfers and Servicing—Targeted Improvements to Evaluating Participating Interests.” Its next milestone is Board deliberations.
Why FASB acted
The project came out of FASB’s 2025 agenda consultation. According to the FASB staff’s September 16 handout, 21 stakeholders commented on Topic 860, and some (primarily banks) called it a top priority. Stakeholders broadly agreed that practice is diverse, and most said standard setting would improve GAAP.
The Securities Industry and Financial Markets Association (SIFMA) went further in its June 2025 comment letter. It asked FASB to eliminate or improve the rule, saying it often produces unintuitive conclusions for commonplace transactions.
To see why, start with what the rule requires today.
What is a participating interest under ASC 860?
A participating interest is a portion of a financial asset, such as a slice of a loan, that shares in that asset exactly like every other portion. Under ASC 860-10-40-6A, it must be a pro rata ownership interest, receive a proportionate share of every cash flow, have equal priority with no subordination or recourse, and no party can pledge or exchange the whole asset alone.
Think of it as slicing a pie
Think of a loan as a pie. A participating interest is a slice that’s the same pie all the way through, served at the same time as every other slice. If one slice gets fed first or is guaranteed a refill, it’s a different kind of claim.
That matters because ASC 860 only lets you derecognize part of a financial asset if that part is a participating interest. If it isn’t, the FASB staff handout explains, the transfer must be accounted for as a secured borrowing.
The built-in exceptions
The definition carves out a few items. Servicing fees don’t count against proportionality if they aren’t subordinate and aren’t significantly above what a substitute servicer would need. Transfer proceeds are excluded. Standard representations and warranties, servicing obligations and set-off sharing don’t count as recourse, and a set-off right alone doesn’t disqualify an interest.
One more point: these rules apply to transfers of part of an asset. If you transfer the entire loan, including through a 100% participation, you skip the participating interest test and go straight to the sale conditions, as Deloitte’s On the Radarnotes.
Passing the participating interest test is only step one. The transfer still has to meet the sale conditions.
How do the ASC 860 sale conditions apply to loan participations?
A participation that qualifies as a participating interest still gets sale accounting only if the bank surrenders control. ASC 860-10-40-5 sets three conditions: the interest must be legally isolated from the seller, each participant must be able to pledge or exchange what it bought, and the seller can’t keep effective control.
- Legal isolation. The interest must be beyond the reach of the seller and its creditors, even in receivership. In its comment letter to FASB, audit firm RSM said the depth of this analysis varies with how entities read continuing involvement, auditor experience and whether the market demands a legal opinion.
- The participant’s right to pledge or exchange. Participation agreements often require the lead bank’s consent before a participant resells. Check whether that consent could, in practice, block the participant from selling or pledging.
- No effective control. Watch for agreements that both entitle and obligate the seller to repurchase, or a unilateral right to call back participations.
If the portion isn’t a participating interest, or any condition fails, the transfer is a secured borrowing. The stakes show up across a bank’s financial statements.
Why does sale vs. secured borrowing matter for banks?
Sale versus secured borrowing decides how big your balance sheet looks, when you book gains, where your credit loss allowance sits, and what you report to regulators. If a participation fails sale accounting, the whole loan stays on your books and the cash received is recorded as a borrowing.
- Total assets and leverage. A failed sale keeps the full loan on the balance sheet with a matching liability, which can affect leverage-based capital ratios.
- Credit loss allowance. Loans you keep carry a current expected credit loss (CECL) allowance, including the participated portion.
- Gain timing. A premium on a participation sale can’t be booked as a gain until sale accounting applies.
- Call Reports. Bank Call Reports follow ASC 860 for participations, as the Federal Financial Institutions Examination Council (FFIEC) explained in its June 2011 supplemental instructions.
A familiar example: SBA 7(a) loan sales
Many community banks sell the guaranteed portion of Small Business Administration (SBA) 7(a) loans at a premium, which they must refund if the loan prepays within 90 days. The FFIEC’s 2011 instructions treat that refund obligation as recourse. The guaranteed portion isn’t a participating interest during the 90 days, so the transfer is a secured borrowing until the window closes.
That’s the rule working as written. The harder cases are where practice has split.
Where does diversity in practice show up?
Diversity shows up where the definition calls for judgment: how much servicing fee is too much, whether retained servicing alone breaks the analysis, how to treat linked notes, and whether legal title matters. FASB hasn’t published its own issue list yet, but stakeholder comment letters point to the likely targets.
1. When is a servicing fee “significantly above” fair compensation?
Servicing fees are ignored only if they aren’t “significantly above” what a substitute servicer would need, and the guidance doesn’t define “significantly.” Two banks keeping the same 25-basis-point strip could reach different conclusions.
This isn’t theoretical. In a 2010 Federal Register notice, the SBA noted that its lenders often retained an income stream above the required servicing fee. That’s exactly what the proportionate cash flow test examines.
2. Does retained servicing alone break derecognition?
RSM asked whether retained servicing rights alone could cause the transfer of all other portions of a loan to fail, if those portions aren’t participating interests. That matters to any bank that sells most of a loan but keeps servicing.
3. How should linked notes be treated?
Banks sometimes split a loan into separate A and B notes instead of selling a participation. RSM asked whether the guidance applies when a separate note’s payments are linked to another note from the same borrower. Similar economics can end up with different accounting.
4. Does legal title matter?
RSM also asked whether transferring legal title is relevant. Some stakeholders view a participation sold without first moving the asset into a trust or similar vehicle as nonrecourse debt of the seller.
The result: two banks can sell participations on nearly identical terms and report them differently, one as a sale and the other as a secured borrowing.
What should banks selling loan participations do now?
Start with an inventory: which participations you’ve sold and bought, how each was accounted for, and which judgment calls each conclusion rests on. Then size the impact if those calls flipped and tighten your templates. None of this depends on which path FASB chooses.
- Inventory your participations. List each participation sold and purchased, with the agreement, balance and accounting conclusion.
- Map each to the four characteristics. Record how each agreement meets pro rata ownership, proportionate cash flows, equal priority and the pledge-or-exchange test.
- Flag the judgment calls. Mark conclusions that rest on servicing fee levels, retained servicing, linked notes, consent rights or legal isolation evidence.
- Size the impact. Estimate how total assets, leverage, the CECL allowance and gains would move if flagged participations flipped.
- Check guaranteed-loan sales. Confirm SBA premium refund periods are treated as secured borrowings until they end.
- Tighten your templates. With legal counsel, remove terms that cause failures without a business reason, such as a lead bank’s unilateral right to pledge the whole loan.
- Benchmark your disclosures. Compare how peer banks describe participations and secured borrowings in their 10-K notes.
- Engage early. Follow FASB’s meetings and plan to comment on the exposure draft.
Tip: Don’t forget the buy side. ASC 860 is designed to produce symmetrical results, so if you buy participations, the seller’s accounting affects yours.
How can Finrep help banks prepare?
Finrep, the AI platform for financial reporting, helps with steps 2, 3 and 7. Fina, Finrep’s AI assistant, searches more than 10 million SEC filings, so you can see how peer banks describe loan participations, secured borrowings and SBA loan sales in their transfers and servicing notes, with every answer cited to the source filing. Finrep’s Accounting Memos help you document your ASC 860 analysis in a form your auditors can trace.
For where SEC staff have questioned bank disclosures, see Finrep’s 2026 SEC comment letter trends for payments and financial services. Comparing research tools? See how Finrep compares to Intelligize for EDGAR research.
Teams using Finrep’s disclosure comparison and EDGAR search cut month-end prep from 10 days to 3–4 days, with 60–70% fewer review loops with auditors (Finrep client data, 2025).
Frequently asked questions
What is FASB’s participating interest project?
FASB’s participating interest project is a technical agenda project on Topic 860, Transfers and Servicing, added on September 16, 2026. Its scope is to identify and address diversity in practice in applying the participating interest guidance, which decides whether a transfer of part of a financial asset, such as a loan participation, can be accounted for as a sale. Securities-for-securities lending is outside its scope.
What happens if a loan participation isn’t a participating interest?
If a transferred portion of a loan doesn’t meet the participating interest definition, it can’t qualify for sale accounting. The seller keeps the entire loan on its balance sheet and records the cash received as a secured borrowing. The buyer records a secured receivable rather than a loan participation. Sale accounting may become available later if the terms causing the failure end, as with the SBA 90-day premium refund period.
Is FASB going to eliminate the participating interest guidance?
FASB hasn’t decided. Staff presented two paths at the September 16, 2026 meeting: eliminate the guidance and evaluate partial transfers under the general sale conditions in ASC 860-10-40-5, or keep it and make targeted improvements. FASB’s technical agenda lists the project as targeted improvements to evaluating participating interests. Any change would go through a proposal and public comment first.
When will the participating interest changes take effect?
There is no effective date yet. As of October 2026, the project’s next milestone is Board deliberations. FASB would then issue a proposed Accounting Standards Update for public comment, consider the feedback, and issue a final standard with an effective date and transition method. Banks should keep applying current ASC 860 guidance until then.
How can Finrep help banks with participating interest disclosures?
Finrep, the AI platform for financial reporting, searches more than 10 million SEC filings on EDGAR. Bank accounting and SEC reporting teams use it to benchmark how peers disclose loan participations, secured borrowings and SBA loan sales, research SEC comment letter trends, and draft technical accounting memos. Every answer links back to the source filing for audit-ready review.
Key takeaways
- The project is real but early. FASB added it on September 16, 2026, to address diversity in applying the participating interest guidance. Nothing changes until a final standard is issued.
- Two paths are on the table. FASB could eliminate the guidance or make targeted improvements. The project’s name points to targeted improvements.
- Judgment calls are most at risk. Servicing fee levels, retained servicing, linked notes, legal title and legal isolation evidence are where stakeholders report diversity.
- The stakes are balance-sheet-wide. Sale versus secured borrowing affects total assets, leverage, the CECL allowance, gain timing and Call Reports.
- Start your inventory now. Knowing which participations rest on judgment calls lets you size the impact and comment with real data.
Want to see how peer banks disclose their loan participations before FASB’s proposal lands? Finrep gives your team cited answers from more than 10 million SEC filings.
