The Financial Accounting Standards Board and the International Accounting Standards Board plan to reconsider the standards for the types of repurchase transactions that Lehman Brothers used to shift $50 billion temporarily off its balance sheet before issuing its quarterly financial statements.
The two boards will be meeting Thursday to discuss the related issues of derecognition and securitization, and the subject is expected to come up. IASB Chairman Sir David Tweedie said that International Financial Reporting Standards does not provide for so-called Repo 105 transactions. Lehman twisted the rules of U.S. GAAP to account for the repo transactions as sales rather than financings, according to a recent report by bankruptcy examiner Anton Valukas, because the assets were 105 percent or more of the cash received (see Lehmans Accounting Sleight of Hand Was Less Than Magical).
We dont allow it, said Tweedie. Thats why we have principles, not rules, so you cant do it. They find ways to get around rules.
During a joint appearance Wednesday at the Japan Society in New York with his U.S. counterpart, FASB Chairman Robert Herz, Tweedie expressed confidence that the two boards would reach their goal of settling many of the major differences between the two sets of accounting standards by June 2011. They expect to release a blizzard of exposure drafts outlining many of the revised standards in the next three to six months. Once a standard is finalized and takes effect, they plan to review it every two and a half years to see what worked and what needs to be revised.
One of the new issues will be Repo 105, which the Lehman report threw into sharp focus last month. The Securities and Exchange Commission is reportedly asking a number of financial firms and insurance companies if they have been using such transactions. The two standard-setting boards plan to discuss the accounting for repo transactions at their next joint meeting.
FASB is looking at some proposals weve put forward, said Tweedie. Were not a million miles away from where you are here. Were just trying to make it clearer. And of course, we have to make sure that, whatever happens, Repo 105 cannot happen again. But then again, we have to be careful. Were not going to say it wont, but we just have to make sure we do our best to stop it as best we can.
Asked about how the two boards viewed exceptions to the repo rules, both Tweedie and Herz were skeptical. I dont know how you can couch things like that as an exception, said Herz. Im kind of old-fashioned. I kind of look at those repos, and say youve given somebody some collateral and youre going to get it back, that doesnt sound like a sale to me. I dont know whether you can call it an exception. You look at the circumstance and you say heres the accounting. Stepping back, its the old substance over form.
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