The Financial Accounting Standards Board has issued an Accounting Standards Update that would revise the rules for how companies can deal with repurchase agreements like the kind Lehman Brothers used to temporarily move billion of dollars of assets off its books before reporting its quarterly results.
ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements, is intended to improve the financial reporting of repurchase agreements ("repos") and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.
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.
Lehman Brothers' use of so-called "Repo 105" repurchase transactions was cited as one of the causes of its collapse in 2008. The bank's former auditor, Ernst & Young, has been the subject of lawsuits by former Lehman investors and the New York State Attorney General.
The amendments in the standards update are intended to improve 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.
In explaining the differences from International Financial Reporting Standards, FASB noted that the consideration of a transferor's ability to repurchase or redeem financial assets transferred on substantially agreed terms, even in the event of default by the transferee, is not required under IFRS. The amendments in the FASB update improve convergence, the board said, by eliminating from U.S. GAAP the need to consider this criterion.
The final standard is available at www.fasb.org.
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