The proposed Accounting S
tandards Update, Transfers and Servicing (Topic 860)-Effective Control for Transfers with Forward Agreements to Repurchase Assets and Accounting for Repurchase Financings, would clarify the guidance for distinguishing repo agreements, and other transfers with forward agreements to repurchase transferred assets, as either sales or secured borrowings, and improve disclosures about them.
"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," said FASB Chair Leslie F. Seidman in a statement. "The board is seeking stakeholder input on changes intended to ensure that investors are getting useful information about these and similar arrangements."
Determining whether a transfer of financial assets in a repurchase agreement (and other transactions with similar attributes) 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 current 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" 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 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.
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.
The exposure draft is available on the
