In general, a repo or repurchase
agreement is the sale of a portfolio of securities with an agreement to
repurchase that portfolio at a later date. Investors
have raised concerns that current accounting and disclosures for repurchase
agreements do not appropriately reflect the transferor’s obligations and risks
resulting from those transactions in certain circumstances, noted FASB Chair
Leslie Seidman. FASB is seeking stakeholder input on changes intended to ensure
that investors are getting useful information about these and similar
arrangements, said Chairman Seidman.
Determining whether a transfer of financial assets in a repurchase agreement 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 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.
Determining whether a transfer of financial assets in a repurchase agreement 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 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, noted FASB, the proposed guidance would result in financial reporting that is more comparable with International Financial Reporting Standards (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 guidance 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.
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, noted FASB, the proposed guidance would result in financial reporting that is more comparable with International Financial Reporting Standards (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 guidance 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.