15 January 2013

FASB proposes improvements to accounting for repurchase agreements

Proposed Accounting Standards Update, 'Transfers and Servicing (Topic 860)—Effective Control for Transfers with Forward Agreements to Repurchase Assets and Accounting for Repurchase Financings', would clarify the guidance for distinguishing these transactions as either sales or secured borrowings and improve disclosures about them.

Determining whether a transfer of financial assets in a repurchase agreement (and other transactions with similar attributes) is a sale or an on-balance-sheet secured borrowing often rests on an evaluation of whether the transferor maintains “effective control” over the transferred asset. Under current U.S. GAAP, effective control is maintained by a transferor, and therefore secured borrowing accounting is required, if there is a contemporaneous forward agreement to repurchase the same or “substantially-the-same” financial asset at a fixed price from the transferee before its maturity. However, effective control is not maintained if a transferor will not recover the transferred asset at the conclusion of the agreement because the asset has matured, resulting in sale accounting if other criteria are met. Stakeholders have said that such an accounting distinction is unwarranted because, during the term of both types of transactions, the transferor retains exposure to the credit risk related to the transferred asset and obtains certain benefits from the asset.

The proposed guidance would eliminate the distinction between agreements that settle before the maturity of the transferred asset and those that settle at the same time as the transferred asset matures. As a result, both types of transfers with forward agreements to repurchase the transferred assets or “substantially-the-same” assets at a fixed price would maintain the transferor’s effective control during the term of the agreement and would be accounted for as secured borrowings. For these types of arrangements, the proposed guidance would result in financial reporting that is more comparable with IFRS. When the transferor does not maintain effective control over a transferred financial asset, the transaction would be required to be assessed under the remaining derecognition conditions in U.S. GAAP to determine whether it should be accounted for as a secured borrowing or sale with a forward repurchase agreement.

Stakeholders also cited the need for more guidance on assessing whether financial assets to be repurchased are “substantially the same” as those initially transferred, as well as the need for improved disclosures regarding the effect of repurchase agreements and other transfers with forward agreements to repurchase transferred assets on the transferor’s risk profile. The proposed guidance would clarify the characteristics of assets that may be considered “substantially the same” and would require new disclosures for certain transfers with forward agreements to repurchase the transferred assets.

In addition, the proposed amendments would change the accounting for a transfer of a financial asset and contemporaneous repurchase agreement financing that asset between the same counterparties (repurchase financings). The proposed guidance would eliminate the current requirement to account for the initial transfer and related repurchase agreement on a combined basis in some circumstances, and would instead require separate accounting for the initial transfer and the repurchase financing.

Press release

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