The Financial Accounting Standards Board has issued an
FASB is soliciting input on its proposals to improve the accounting for repo agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. FASB is asking for comments on the proposals by Jan. 15, 2011.
During the global economic crisis, concerns were expressed about a narrow aspect of existing guidance for determining whether a repo should be accounted for as a sale or as a secured borrowing, said FASB acting chairman Leslie F. Seidman in a statement. The proposals contained in this exposure draft seek to address these concerns by simplifying this guidance.
Bankruptcy examiner Anton Valukas issued a report in March explaining how Lehman Brothers used repurchase agreements that it called Repo 105 to shift $50 billion off its balance sheet at the end of the first and second quarters of 2008 to temporarily hide its debts. The report called attention to the role of Lehmans auditing firm, Ernst & Young, which has argued it wasnt auditing the investment bank during those quarters. However, Ernst & Young has been sued by Lehman investors seeking to recover the money they lost from the collapse of the bank in 2008. FASB
In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets.
The amendments in FASBs proposed update are intended to simplify the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets, as well as implementation guidance related to that criterion.
The exposure draft is available at