Repurchase agreements — FASB redeliberates several issues

Published on: 04 Oct 2013

At its meeting this week, the FASB continued to redeliberate its January 2013 proposed ASU1 and made a number of tentative decisions related to the topics below.

Repurchase Agreements That Settle at Maturity

The Board tentatively decided to amend ASC 8602 to require entities to account for repurchase agreements that settle at maturity (“repos to maturity”) as secured borrowings.

Repurchase Financings

The Board tentatively decided to affirm the guidance in the proposed ASU that would eliminate the requirement in ASC 860 for entities to determine whether to account for repos entered into as part of a repurchase financing separately or as linked to the initial transfer. The Board decided that such repos would be accounted for separately, which would be consistent with the accounting for other repos.

Substantially-the-Same Criterion

The Board tentatively decided to clarify the substantially-the-same assessment under ASC 860 related to dollar-roll transactions. It 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 a substantially-the-same asset.

Editor’s Note: At the Board meeting, the FASB staff clarified that dollar-roll transactions subject to this guidance that are within the scope of ASC 860 would include transactions that involve a transfer of an existing asset with a forward agreement to repurchase a “to be announced” security.

Disclosure Requirements and Scope of Disclosures

The Board tentatively decided to require entities to disclose information about transfers of assets accounted for as sales in which there is a continuing exposure to the transferred assets. The objective of the disclosures is to give financial statement users information that helps them understand the nature of the transactions, the transferor’s continuing exposure to the transferred financial assets, and the presentation of the components of the transaction in the financial statements. As specified in the meeting’s summary of decisions, the Board tentatively agreed to require the following disclosures:

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 815-10-50-4K, 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” (emphasis added).

Transition and Reexposure

The Board tentatively decided to require entities to record a cumulative-effect adjustment to beginning retained earnings for transactions outstanding as of the period of adoption. No transition information would need to be disclosed beyond that already required by ASC 250.

The Board directed the staff to perform further outreach on operational aspects of the tentative decisions as well as on the effective date, early adoption, and applicability of the amendments to private companies. After it reviews the feedback from outreach, the Board will decide whether to expose its tentative decisions for public comment.

1    Proposed FASB 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."

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