An accounting concept that relates to the sale of assets by outright title transfer. It denotes a sale where the buyer takes the property “unencumbered” (following a complete and permanent sale transaction). Unencumbered property or asset is subject to no restrictions imposed by the seller on the buyer’s right to dispose with it as desired and needed.

The seller, once the property is transferred, cannot dictate any certain course of action, to the buyer, regarding uses or way of disposal, nor will be entitled to direct its redelivery to the seller, future repurchase by the seller, or onward disposal to anyone else.

If established, true sale implies that in the case of a seller’s insolvency, its liquidator cannot claim other otherwise- i.e., that the disposal didn’t amount to a “true sale” for accounting purposes, in an attempt to recharacterize the transaction as a loan, unperfected pledge or other form of security which may be rank low in the distribution of insolvency proceeds.

Broadly speaking, true sale describes a transaction in which ownership of an asset is transferred from the original owner / holder (the seller) to another party (the buyer). In the context of a contract, a true sale implies that the ownership of the asset, subject matter of the sale, under the contract is completely and permanently transferred to the buyer (hence, it is considered a true sale). As a result, the buyer assumes all the risks and becomes entitled to benefits associated with the asset, and the seller no longer has any rights or control over the asset.

This is meant to protect the buyer’s interests by legally rendering the asset beyond the reach of the seller’s creditors or trustees (in the case of bankruptcy). An asset could also take the form of accounts receivables, intellectual property, annual contracts, or multi-year contracts.

The concept of “true sale” is often used in the context of asset-backed securities (ABS), where the underlying assets (such as loans or mortgages) are sold to a special purpose vehicle, which is desgined to issue securities backed by the cash flows arising from those assets. A true sale is essential to ensure that the assets are completely kept away from the seller’s balance sheet, and consequently that the securities are not subject to any claims by the seller’s creditors.

In accounting, it is essential to determine the legal and financial treatment of the sale or disposal of a financial asset. Ascertaining whether an asset disposal will be treated as a true sale is particularly important in securitization and secured finance transactions.

In the context of receivables sale (factoring), true sale is a term used to describe the sale of a receivable by the owner to another person, such that the receivable is protected from claims against the seller’s assets in the event of the seller’s insolvency. In addition to its legal dimension, true sale has important implications for determining whether or not a transaction can be classified as “off-balance sheet” financing under applicable accounting norms. “

Off-balance sheet presentation, in this specific sense, means that the seller is able to derecognize the receivables it has sold from its balance sheet and can recognize and present the consideration it receives from the financier as cash. For the seller, this can improve its liquidity while taking additional liabilities off its balance sheet.

True sale is set against the case of a secured loan.