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Journal entry — Repurchase agreements — FASB continues to redeliberate proposed guidance

Published on: Dec 20, 2013

At its meeting on December 18, 2013, the FASB made new decisions, and reaffirmed some previous ones, related to its January 2013 proposed ASU1 on repurchase agreements.

Repurchase Agreements That Settle at Maturity

The FASB reaffirmed its earlier decision that transfer of a held-to-maturity security in a repurchase-to-maturity agreement would not taint an entity’s held-to-maturity portfolio. The board previously decided that repurchase-to-maturity agreements would be accounted for as secured borrowing transactions.

Substantially-the-Same Criterion

Earlier this year, the Board tentatively decided that a dollar-roll transaction that does not include a trade stipulation would not be expected to result in the return of a “substantially-the-same” financial asset, whereas a dollar-roll transaction that includes a trade stipulation could, in fact, be considered to result in the return of such asset. At this week’s meeting, the FASB decided to retain the existing “substantially-the-same” guidance in ASC 8602 and abandon the notion that a dollar-roll transaction that does not include a trade stipulation would not be expected to result in the return of a substantially-the-same financial asset. However, given the diversity in application of the substantially-the-same criterion to assess effective control, the FASB indicated that it would consider addressing this issue in a separate project.

Disclosure Requirements

Transfer of Financial Assets Accounted for as Sales

In October, the Board tentatively decided to require the following disclosures about transfers of assets accounted for as sales in which there is a continuing exposure to the transferred assets:3

a. The carrying amounts of assets derecognized as of the date of the initial transfer in transactions for which an agreement with the transferee remains outstanding at the reporting date, by type of transaction (for example, repurchase agreement, securities lending, sale and total return swap, and so forth). If the amounts have changed significantly from prior periods or are not representative of the activity throughout the period, a discussion of the reasons for the change should be disclosed.

b. Information about the transferor’s ongoing exposure to the transferred financial assets by type of transaction [in paragraph (a)]:

1. A description of the arrangements that result in the transferor retaining exposure to the transferred financial assets by  type of transaction

2. The risks related to the transferred financial assets to which the transferor continues to be exposed after the transfer

3. As of the reporting date, the following amounts to provide users of financial statements with information about the reporting entity’s maximum exposure to financial assets that are not recognized in its statement of financial position:
i.    The fair value of assets derecognized by the transferor for transactions described in paragraph (a) by type of transaction.

c. Amounts recorded in the statement of financial position arising from the transaction by type of transaction in paragraph (a), for example, the carrying value or fair value of forward repurchase agreements or swap contracts. To the extent these amounts are captured in the derivative disclosure requirements under paragraph 815-10-50-4B, an entity should provide a cross-reference to the appropriate line item in the disclosure.

These disclosures would apply to transactions that “comprise a transfer of financial assets to a transferee and an agreement done in contemplation of the initial transfer with the same transferee that results in the transferor retaining substantially all of the exposure to the return of the transferred financial asset throughout the term of the transaction.”

At this week’s meeting, the FASB reaffirmed its decision to require these disclosures. In addition, the Board (1) tentatively decided to require disclosure of the amount of proceeds received by a transferor in the transaction and (2) clarified that these disclosures would not be required for dollar-roll transactions that do not meet the substantially-the-same criterion.

Asset Quality Disclosures

Also this week, the FASB tentatively decided to require the following disclosures about the asset quality of transferred financial assets in repurchase agreements and securities lending transactions that are accounted for as secured borrowings:4

a. A disaggregation of the gross proceeds/gross obligation arising from the transaction by the class of financial assets that were transferred in accordance with paragraph 820-10-50-2B

b. The fair value of the financial assets transferred for each class of financial assets

c. Weighted-average contractual duration for each class of financial assets

d. A qualitative discussion of any obligation arising from a decline in the fair value of the transferred financial assets.

Entities would be required to provide these disclosures by type of transaction. In addition, the Board tentatively decided that entities would be required to disclose the tenor of the repurchase or securities lending agreement.

Transition and Effective Date

The FASB affirmed its previous decisions that entities (1) would be required to record a cumulative-effect adjustment to beginning retained earnings for transactions outstanding as of the period of adoption and (2) would not need to disclose transition information other than that already required by ASC 250.

The Board decided that for public entities, the final standard would be effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2014. For nonpublic entities, the final standard would be effective for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. In addition, the FASB decided not to permit early adoption for public entities. However, nonpublic entities may elect to early adopt the requirements for interim periods beginning after December 15, 2014.

Next Steps

The FASB directed the staff to draft a final standard, which is likely to be issued during the first quarter of 2014.

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1   FASB Proposed Accounting Standards Update, Effective Control for Transfers With Forward Agreements to Repurchase Assets and Accounting for Repurchase Financings.

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

3    See the Summary of Board Decisions for the FASB’s October 2, 2013, meeting.

4    See the Summary of Board Decisions for the FASB’s December 18, 2013, meeting.

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