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Journal entry — Repurchase agreements — FASB makes decisions about scope

Published on: Oct 08, 2012

In the second quarter of 2012, as part of its project on reexamining the accounting and disclosure requirements for repurchase agreements and similar transactions in ASC 860,1 the FASB tentatively decided that a repurchase agreement or similar transaction that has all of the following characteristics would be accounted for as a secured borrowing (quoted material is from the Board’s October 3, 2012, Action Alert):

  • “The agreement involves a transfer of existing financial assets at its inception.”
  • “The agreement involves both a right and an obligation to repurchase the financial assets.”
  • “The initial transfer and forward repurchase agreement involve the same counterparty.”
  • “The agreement to repurchase the financial assets is entered into contemporaneously with, or in contemplation of, the initial transfer.”
  • “The repurchase price is fixed or readily determinable.”
  • “The financial assets specified under the forward repurchase agreement are identical to or substantially the same as the financial assets transferred at inception.”

The Board indicated that it will further clarify the term “substantially the same” as used above.

Editor’s Note: The Board decided that when repurchase agreements and similar transactions do not have one or more of the characteristics above, entities would continue to evaluate the other ASC 860 derecognition conditions (e.g., legal isolation and transferee’s rights to pledge or exchange)2 in determining whether to account for them as secured borrowings or sales with forward repurchase commitments. The Board intends to clarify the application of the legal isolation condition.

At its October 3 meeting, the Board decided to limit the application of the six characteristics above to the following transactions:

  • “[R]epurchase agreements and similar transactions that would be settled through repurchase of financial assets that are the same or substantially the same as those initially transferred.”
  • Agreements to transfer a financial asset with a forward contract to repurchase the financial asset when the settlement date of the forward contract coincides with the maturity date of the transferred financial assets, resulting in “an amount of cash equal to the redemption or settlement value of the initially transferred financial assets (or the difference between that value and the fixed repurchase price).”

Repurchase transactions other than those described above would not be evaluated on the basis of the aforementioned six characteristics but in accordance with the other derecognition criteria in ASC 860.

Editor’s Note: The Board decided to eliminate the guidance in ASC 860 on repurchase financings. Repurchase agreements that are entered into as part of a repurchase financing would also be evaluated by using the six characteristics described above (if they physically settle with delivery of the same or substantially the same asset or cash settled at maturity). The results may differ from the current results, because ASC 860 indicates that linked repurchase financings are forward contracts that an entity must evaluate under ASC 815 to determine whether they are derivatives.3

At a prior meeting, the Board decided to require entities to provide information about (1) a disaggregation of the carrying value of the borrowing based on the type of collateral pledged and (2) the amount of repurchase agreements and similar transactions that did not qualify as a secured borrowing because the transferred assets were not considered substantially the same.

The Board expects to discuss transition later this month and to issue an exposure draft on repurchase agreements later this year.

 


[1] For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

[2] See ASC 860-10-40-5.

[3] See ASC 860-10-40-42 through 40-47.

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