IAS 39 - Accounting for repo transactions

Date recorded:

In August 2013, the Committee received a request to clarify whether three different transactions should be accounted for separately or be aggregated and treated as a single derivative. The three transactions are as follows:

  • Transaction 1 – bond purchase: Entity Alpha purchases a certain amount of medium-long term bonds (the ‘Bond’) from Entity Beta, through one or more purchase transactions within a certain period and with the same settlement date;
  • Transaction 2 (interest rate swap): Entity Alpha enters into one or more interest rate swap contracts with Entity Beta for hedging purposes for an overall notional amount equal to that of the Bond. The trade date and the start date of the interest rate swap are the same as the purchase date and the settlement date respectively of the Bond in Transaction 1. Under the interest rate swap contract, Entity Alpha receives a variable rate of interest (index + spread X) and pays a fixed rate of interest equal to the fixed coupon rate of the Bond. Where there is foreign exchange risk, this is also hedged with a cross-currency interest rate swap ; and
  • Transaction 3 (repurchase agreement): Entity Alpha and Entity Beta enter into a repurchase agreement (the ‘Repo Agreement’). The trade date of the Repo Agreement is the same as the settlement date of the Bond and also the maturity date of the Repo Agreement matches the maturity date of the Bond. Under this transaction, Entity Alpha sells the Bond at the spot price to Entity Beta and it uses the cash received in this transaction to finance the purchase of the Bond in Transaction 1.

With regard to the request, the submitter also asks how an entity should interpret and apply paragraph B6 of Guidance on Implementing IAS 39 Financial Instruments: Recognition and Measurement (‘IG B6’). Paragraph IG B6 of IAS 39 provides guidance on whether non-derivative transactions should be aggregated and treated as a derivative.

Staff summarised the feedback they received from the outreach they performed and presented this to the Committee. Their conclusion was the Committee cannot address the specific issue as it requires judgement to be made, which would depended on the specific facts and circumstances related to this issue. In addition, the current Standard provides sufficient guidance to enable the entity to identify the analysis required to determine the accounting treatment. Also, they suggested due to the complexity of the issue, the entity should consider disclosing the relevant information about these transactions, subject to a materiality assessment that considers both qualitative and quantitative characteristics of the transactions.

Staff suggested the Committee do not take this issue onto its agenda and presented their proposed wording for a tentative agenda decision.

The Chairman began by highlighting that the issue raised deals with a specific issue and usually the Committee would not discuss specific scenarios. Therefore, he requested the Committee to focus on indicators of whether the transaction would be treated in aggregate or each transaction dealt with as a single transaction rather than addressing any specific issues with each transaction.

A member began the discussion by saying this is a complicated topic and an element of judgement is required. In addition, the example given in IG B6 is where the counterparty is the same and therefore having the same counterparty is an indicator rather than a rule. The member added that the last paragraph of IG B6 alludes that the objective of entering into several contracts should be considered i.e. if it was to reflect the same effect as though it would have been one transaction.

Another member agreed with Staff’s recommendation and added that the Committee should not and could not analyse this issue. In this member’s opinion the three transactions reflect a derivative.

A member said that IG B6 is implementation guidance and therefore not a principle that must be followed. The difficulty is if this was the only guidance provided.

Another member reiterated that IG B6 suggests the substance of transactions should be considered and the three transactions presented must have been intended with one goal rather than it being coincidence they all occurred in this manner. Therefore, when dealing with such transactions it is important to consider the ultimate goal.

Another member wanted the agenda decision to be scaled back and also include a discussion on the complication of the issue and that judgement would be required to determine the accounting treatment.

A member added that such transactions are relatively common structured transactions and there is divergence in practice on the treatment. The accounting treatment of such transactions is usually driven by the facts and circumstances related to the transactions and also how an entity interprets IG B6. A member questioned why such transactions were common. The first member discussed there are various economic and accounting reasons for entering into such transaction, as well as the entity’s ability or inability to enter into different types of transactions.

Another member was concerned that the staff paper was focused on implementation guidance, which does not form part of the actual Standard and suggested the agenda decision should be carefully written.

The Chairman concluded that the Committee agreed not to take this issue onto its agenda and that the agenda decision will be re-written with the help of two members.

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