At its meeting today, the FASB decided to amend the guidance on the accounting for repurchase agreements (“repos”).

ASC 860, Transfers and Servicing, states that if a transferor maintains effective control over financial assets, it is precluded from accounting for the transfer of financial assets as a sale; rather, it is required to account for the transfer as a secured borrowing. More specifically, ASC 860-10-40-24(b) states that a transferor maintains effective control over transferred financial assets if there is a repurchase agreement that both entitles and obligates the transferor to repurchase financial assets before their maturity. It also states that one criterion that indicates that a transferor maintains effective control over a financial asset is that the transferor is able to purchase or redeem the financial asset on substantially agreed terms, even in the event of default by the transferee. ASC 860 requires that to comply with this criterion, the transferor must maintain cash or sufficient collateral to fund substantially all of the cost of purchasing replacement financial assets from others.

The FASB believes that a transferor’s ability to purchase or redeem financial assets on substantially agreed terms is not necessary in an entity’s determination of whether it maintains effective control over transferred financial assets, even in the event of default by the transferee. The Board has therefore decided to remove the guidance in ASC 860-10-40-24(b).

To reflect this change, the FASB expects to issue a proposed ASU in November with a comment period that would end sometime in January of 2011. In addition, the FASB indicated that entities will not be allowed to early adopt the ASU once effective and that it will apply only to transactions entered into or modified in interim and annual periods beginning after March 31, 2011.