The Financial Accounting Standards Board (FASB) on Thursday updated financial reporting guidance for repurchase agreements by changing the accounting for repurchase-to-maturity transactions and repurchase financings, as well as adding two new disclosure requirements.
According to the FASB, repurchase agreements are transactions in which the transferor, or “repo party,” transfers a financial asset to a transferee, or “repo counterparty,” in exchange for cash. The deal also enables the transferor to reacquire the financial asset in the future for an amount equal to the cash exchanged, plus or minus a stipulated interest factor.
These agreements, though, have increasingly involved asset types, such as asset-backed securities, structured debt securities, and sovereign debt securities, that are not US Treasury or government agency securities and may be less liquid. That can affect how transactions operate and how investors consider the risks associated with them.
Investors had expressed concerns to the FASB about the distinction in US Generally Accepted Accounting Principles (GAAP) between repurchase agreements that settle at the same time as the maturity of the transferred financial asset and those that settle any time before maturity, FASB Chairman Russell Golden noted.
“Eliminating that distinction will result in financial reporting that more appropriately reflects the transferor’s obligations and risks across similar transactions,” he said in a written statement on Thursday.
Under Accounting Standards Update No. 2014-10, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, such transactions going forward will be accounted for as secured borrowings.
According to the FASB, the new rule eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting.
The standard also better aligns US accounting rules for repurchase-to-maturity transactions with the international rules written by the International Accounting Standards Board (IASB), the FASB noted.
In addition, the guidance introduces the following two disclosures:
- Transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction.
- Repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings about the nature of collateral pledged and the time to maturity of those transactions.
The FASB proposed a new accounting rule on repurchase agreements in January 2013, citing significant changes in the market since the standard-setting board issued its first rules on the matter in 1996.
At the time, AccountingWEB reported that the changes to repurchase agreement accounting likely stemmed from less than full disclosure of accounting practices for repurchase agreements that came to light in the collapse of Lehman Brothers.
For public companies, the new accounting changes are effective for the first interim or annual period beginning after December 15, 2014. In addition, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual period beginning on or after December 15, 2014. The disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015.
For private companies and not-for-profit organizations, all changes are effective for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015.
Early application is prohibited for public companies; all other companies and organizations may elect to apply the requirements for interim periods beginning after December 15, 2014.