In brief: FASB clarifies scope of new repurchase accounting model (No. 2012-45)
In brief
At its October 3 meeting, the FASB decided to eliminate the existing guidance for evaluating if a repurchase agreement entered into as part of a "repurchase financing" should be considered linked to a previously transferred financial asset. The board's decision means that under its proposed amendments to the existing model, these repurchase agreements will be accounted for as secured borrowings. This In brief article provides an overview of the FASB's discussions.
What's new?
At its October 3 meeting, the FASB (the “board”) decided to eliminate the existing guidance for evaluating if a repurchase agreement entered into as part of a "repurchase financing" should be considered linked to a previously transferred financial asset. The board's decision means that under its proposed amendments to the existing model, these repurchase agreements will be accounted for as secured borrowings.
The FASB also decided to limit the scope of the proposed amendments to the existing model to transfers of financial assets with an agreement to repurchase assets that are identical or "substantially the same."1 The scope includes repo to maturity transactions.
What are the key decisions?
A "repurchase financing" is a series of transactions where:
- Counterparty A transfers a financial asset to Counterparty B and contemporaneously or in contemplation with the transfer,
- Counterparty B executes a repurchase agreement with Counterparty A.
Under the current accounting model for repurchase financings, a repurchase agreement that is entered into as part of a repurchase financing is not accounted for as a secured borrowing if the overall transaction is required to be accounted for on a “linked” basis. When accounted for on a "linked" basis, the components of the transactions are considered as a unit and generally reflected as a derivative instrument. The board decided to amend the current model for repurchase financings and require that repurchase agreements meeting certain criteria be accounted for as secured borrowings.
The board also decided to limit the proposed amendments to the existing model which would require secured borrowing accounting for the following:
- Transfers of financial assets with an agreement to repurchase identical financial assets;
- Transfers of financial assets with an agreement to repurchase substantially the same financial assets; and
- Transfers of financial assets with a forward contract to repurchase the financial asset, for which the settlement date of the forward coincides with the maturity date of the transferred financial asset resulting in net cash settlement (known as "repo to maturity" transactions).
Repurchase agreements requiring net cash settlement or which allow the delivery of an amount of financial assets (different from the ones transferred) that are readily convertible to cash and equal to the repurchase date fair value of the transferred financial assets will not be included in the scope of the proposed amendments to the repurchase agreement accounting model. These transactions will be subject to the existing sale accounting rules for financial assets.
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. This decision will impact companies that engage in "repurchase financing agreements" and currently account for the components as a linked transaction as discussed above. While the accounting treatment may not change in many cases, additional disclosures may be required.2
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?
An exposure draft is expected during the fourth 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).
1See In brief 2012-33, FASB makes further decisions on repurchase agreement accounting, for discussion of the criteria that, if met, would require a repurchase agreement to be accounted for as a secured borrowing.
2See In brief 2012-42, FASB determines additional disclosure requirements for repurchase agreements.
Authored by:
Chip Currie
Partner
Phone: 1-973-236-5331
Email: frederick.currie@us.pwc.com
Mary Perrotta
Director
Phone: 1-973-236-7575
Email: mary.b.perrotta@us.pwc.com
Kristin Derington-Ruiz
Senior Manager
Phone: 1-973-236-7093
Email: kristin.derington-ruiz@us.pwc.com
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