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Journal entry — Repurchase agreements — FASB makes further progress

Published on: Aug 02, 2012

Earlier this summer, as part of its project on reexamining the accounting and disclosure requirements for repurchase agreements (repos) or similar transactions in ASC 860,1 the FASB tentatively decided to pursue an approach that would (1) eliminate the existing criteria for assessing effective control for repos and (2) specifically identify the types of repos that must be accounted for as secured borrowings rather than as sales transactions with forward repurchase commitments. Under this approach, transferors would evaluate the characteristics of repos2 to determine whether they would be accounted for as secured borrowings. As a result of this exception to the derecognition guidance in ASC 860, transferors would not need to assess effective control, continuing involvement, or risks and rewards.

At its meeting yesterday, the Board discussed whether the exception to the derecognition guidance should include repurchase agreements or similar transactions that involve a sale and repurchase of substantially the same assets rather than identical assets. The Board tentatively decided that the exception that would require entities to apply secured borrowing accounting should also include repurchase agreements that involve a sale and repurchase of financial assets that are substantially the same. As part of this tentative decision, the Board decided to clarify the existing criteria for determining whether a financial asset is “substantially the same.” In addition, the Board tentatively decided to require disclosure of the judgments the entity used in determining (1) that a transaction was a secured borrowing rather than a sale with a forward repurchase commitment and (2) whether transactions with similar, but not identical, financial assets satisfy the “substantially the same” criteria.

The Board also discussed how to evaluate repurchase agreements and similar transactions that do not meet one or more of the proposed characteristics that an entity would use to determine whether secured borrowing accounting is required (i.e., when the exception discussed above does not apply). The Board tentatively decided that an entity would evaluate such arrangements by using the existing derecognition criteria under ASC 860. In addition, the Board decided that it would clarify the application of the isolation condition for derecognition in ASC 860.

The Board is expected to discuss additional disclosures and transition at a future meeting and publish an exposure draft in the third quarter of 2012.

 


[1] FASB Accounting Standards Codification Topic 860, Transfers and Servicing.

[2] See the FASB’s June 27, 2012, Action Alert, which provides characteristics of a repo that would lead an entity to account for it as a secured borrowing.

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