Repossessed properties managed or held in title for financiers: whose asset is it?

To complete enforcement, a servicer or a vehicle within its group is sometimes registered as the legal owner of repossessed properties, or buys them at auction through a credit bid, even though the financier funds the bid and receives all proceeds; legal title alone does not make the property the servicer's asset, while a servicer that genuinely buys properties with its own funds and bears price risk must recognise them, so the balance sheet can be wrong by the full value of a property portfolio in either direction.

Under the nominee, trust or mandate documents, who funds the acquisition, who receives sale proceeds and rental income, and who bears losses if values fall? Can the servicer sell, pledge or use the property for its own benefit, or only on the financier's instructions? Is the title-holding entity a subsidiary of the servicer, and if so does the servicer consolidate it, or is it a vehicle controlled by the financier? Where the servicer does acquire properties for itself, does it intend to sell them in the ordinary course after refurbishment, hold them for rental, or sell them as they are within a short period?

1. Obtain the legal documents governing each title-holding arrangement and identify who funds the acquisition, who receives proceeds and income, and who bears price and holding cost risk.
2. Where the servicer holds title only as nominee or agent, has no exposure to the property's value and must act on the financier's instructions, do not recognise the property; the arrangement is custodial.
3. Where the title-holding vehicle (REO vehicle) is legally owned by the servicer, do not assume it is a subsidiary: apply IFRS 10 to the vehicle. If the financier directs its relevant activities (pricing, disposals, funding) and absorbs its variable returns, the financier controls it and the servicer does not consolidate it despite holding the shares. If the servicer does control and consolidate the vehicle, the properties appear in the consolidated statements only if the vehicle itself controls them; a vehicle that holds them as nominee under a back-to-back agreement does not.
4. Where the servicer or its consolidated vehicle controls the properties, typically because it acquired them with its own funds, can direct their use and sale, and is exposed to their price and holding-cost risk, recognise them and classify by intended use: inventory if held for sale in the ordinary course of business (including after refurbishment), investment property if held to earn rentals or for capital appreciation, and held for sale (IFRS 5) only for non-current assets whose carrying amount will be recovered principally through a sale that is highly probable within twelve months (including a property acquired exclusively with a view to resale outside the ordinary course of business, if the criteria are met at or shortly after acquisition).
5. Recognise any funding received from the financier for such properties as a liability, not as a reduction of the asset; but if repayment is limited to the property's proceeds and the financier keeps substantially all the upside and downside, revisit step 2, because the servicer may not control the property at all.
6. Reassess when agreements change, for example when a financier assigns properties to the servicer at a fixed price.

Properties not recognised are not measured; disclose their nature and any obligations or risks the servicer retains. Properties recognised as inventory are measured at cost (purchase price, transfer costs and refurbishment) and written down to net realisable value: estimated selling price less estimated costs to complete and costs to sell. Investment property is measured initially at cost and then under the fair value or cost model as elected. Non-current assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell and are not depreciated.

Disclose: (1) the nature of title-holding and nominee arrangements and the basis for not recognising properties held for financiers, including the approximate number or value where useful and any residual obligations such as property taxes or liabilities to occupiers; (2) for recognised properties, the classification, carrying amounts, measurement basis and any write-downs; (3) significant judgements in concluding whose asset the property is; (4) any guarantees or indemnities given to financiers in respect of these properties.

• Recognising properties on the balance sheet simply because the servicer is the registered owner
• omitting properties acquired with the servicer'
• s own funds because they were bought at an enforcement auction on behalf of the portfolio
• classifying properties held for refurbishment and resale in the ordinary course of business as investment property or as held for sale under IFRS 5 rather than inventory
• assuming a title-holding vehicle is, or is not, a subsidiary purely because of who holds its shares
• netting financier funding against the properties
• failing to disclose obligations that attach to the registered owner, such as fees, taxes or claims from occupiers.