The Financial Accounting Standards Board has released a new accounting standard to address some of the problems with financial reporting on repurchase agreements, such as those that contributed to the demise of MF Global.
Accounting Standards Update No. 2014-10, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. It also requires enhanced disclosures about repurchase agreements and other similar transactions.
The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements.
Going forward, these transactions would all be accounted for as secured borrowings. The guidance 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 new guidance also brings U.S. GAAP into greater alignment with International Financial Reporting Standards for repurchase-to-maturity transactions.
“The new guidance addresses investor concerns about the distinction in 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,” said FASB chairman Russell G. Golden in a statement. “Eliminating that distinction will result in financial reporting that more appropriately reflects the transferor’s obligations and risks across similar transactions.”
Back in 2011, FASB adjusted the accounting standards for repurchase agreements in response to the collapse of Lehman Brothers, which had used transactions that it dubbed Repo 105 to temporarily shift $50 billion in debt off its balance sheet at the end of two successive quarters in 2008 (see FASB Changes Rules for Lehman-like Repo Agreements).
The new accounting standards update addresses problems stemming from the MF Global scandal in 2011(see FASB Plans to Revise Repo Agreement Standards). They require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The update also requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings.
The accounting changes in the update are effective for public companies for the first interim or annual period beginning after Dec. 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual period beginning on or after Dec. 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after Dec. 15, 2014, and interim periods beginning after March 15, 2015. For all other entities, all changes are effective for annual periods beginning after Dec. 15, 2014, and interim periods beginning after Dec. 15, 2015. Earlier application for a public company is prohibited, but all other companies and organizations may elect to apply the requirements for interim periods beginning after December 15, 2014.