Repurchase Agreements — FASB Agrees on Exception-Based Approach
In March, the FASB added to its agenda a project on reexamining the accounting and disclosure requirements for repurchase agreements (repos) in ASC 860.1 At that time, the Board instructed the staff to consider whether (1) ASC 860’s effective-control2 criteria for repos can be amended to address constituents’ concerns and (2) new disclosure requirements for repos should be developed.3
On June 27, 2012, the Board met to discuss an approach to addressing whether a repo should be accounted for as a sale (i.e., derecognize the security and recognize any gain or loss in earnings) or a borrowing (i.e., keep the security on the books and treat the cash received as a liability). The Board tentatively decided to pursue an approach that would eliminate the existing criteria for assessing effective control for repos and specifically identify the types of repos that should be accounted for as secured borrowings rather than as sales. Under this approach, transferors would evaluate the characteristics4 of repos to determine whether they should be accounted for as secured borrowings. As a result, transferors would not need to assess effective control, continuing involvement, or risks and rewards.
Additional items that will be discussed at future Board meetings include (1) the implications of this exception-based alternative to other similar arrangements (e.g., dollar roll repos) and (2) disclosures that will be required as a result of these changes. The Board also directed the FASB staff to explore whether the Board should add to the FASB’s project plan a potential project on the overall derecognition model in ASC 860. The Board is expected to publish an exposure draft on the repo proposals in the third quarter of 2012.
[1] FASB Accounting Standards Codification Topic 860, Transfers and Servicing.
[2] If effective control is maintained, the repo is accounted for as a borrowing. If effective control is not maintained and the other criteria in ASC 860 are met, the repo is accounted for as a sale.
[3] See Deloitte’s March 22, 2012, journal entry for more information about the FASB’s tentative decision regarding the addition of a project on repurchase accounting to its project plan.
[4] 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.
