In brief: FASB tentatively agrees on approach for repurchase agreement accounting (No. 2012-19)
In brief
The FASB tentatively decided this week to propose specifying the types of repurchase agreements (also known as "repos") that should be accounted for as secured borrowings based on six criteria. These types of transactions would be an exception to the general guidance for derecognition of financial assets. The existing criteria for assessing effective control of repurchase agreements would be eliminated under this approach. This In brief article provides an overview of FASB's discussions, including the six criteria and what the FASB plans to do next.
What's new?
The FASB tentatively decided this week to propose specifying the types of repurchase agreements (also known as “repos”) that should be accounted for as secured borrowings based on six criteria. These types of transactions would be an exception to the general guidance for derecognition of financial assets.1 The existing criteria for assessing effective control of repurchase agreements would be eliminated under this approach.
At the meeting, the FASB also instructed its staff to research a potential project that would broadly assess the overall derecognition model.
What is the reason for this decision?
The FASB added this project to its agenda in March 2012 with an objective to differentiate between repurchase agreements that are accounted for as secured borrowings and those that are reported as sales of the transferred financial assets with forward purchase agreements. Refer to In brief 2012-05, FASB adds project to look at repurchase agreement accounting, for further background information.
In connection with its outreach efforts, the FASB heard from constituents that repurchase agreements are generally viewed as financing transactions and should be accounted for as such. The FASB decided that specifying the types of repurchase agreements that should be accounted for as secured borrowings would expeditiously address this feedback and achieve greater consistency in the accounting for these transactions.
The FASB decided that a repurchase agreement that meets all of the following six criteria would be accounted for as a secured borrowing:
- It involves a transfer of existing financial assets at the inception
- It involves both a right and an obligation to repurchase the financial assets
- The initial transfer and forward repurchase agreement involve the same counterparty
- The agreement to repurchase the financial assets is entered into contemporaneously, or in contemplation of, the initial transfer
- The repurchase price is fixed or readily determinable
- The financial assets specified under the forward repurchase agreement are identical to the financial assets transferred at inception
Is convergence achieved?
While this is a FASB-only project, it could result in greater consistency in the accounting for repurchase transactions under U.S. GAAP and IFRS, even though the underlying approach differs. IFRS requires a “risk and rewards” approach that generally results in treating repurchase agreements as secured borrowings.
Who's affected?
This project is likely to affect some companies that engage in repurchase agreements or similar transactions. The decision this week will require certain repurchase agreements to be accounted for as secured borrowings that may have previously been accounted for as sales.
What's the effective date?
No effective date has been proposed yet. The effective date will likely depend on the extent of the proposed changes and the amount of time companies will need to implement those changes.
What's next?
At this meeting, the discussion focused on a subset of repurchase agreements — primarily plain-vanilla repurchase agreements — that includes repurchase agreements where the repurchase is before maturity and “repo-to-maturity” transactions.
The FASB plans to discuss at a future meeting the application of the proposed approach to “dollar rolls” and other similar transactions, as well as the need for enhanced disclosures. The FASB also intends to discuss examples of repurchase agreements that should be accounted for as secured borrowings as a result of applying the six criteria. An exposure draft will likely follow, perhaps as early as the third quarter of 2012.
Questions?
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-7803).
1ASC Topic 860, Transfers and Servicing
Authored by:
Greg McGahan
Partner
Phone: 1-973-236-5250
Email: gregory.mcgahan@us.pwc.com
Mary Perrotta
Director
Phone: 1-973-236-7575
Email: mary.b.perrotta@us.pwc.com
Craig Cooke
Director
Phone: 1-973-236-4705
Email: craig.cooke@us.pwc.com
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