At its November 7 meeting, the FASB (the “board”) discussed the effect on financial reporting complexity of the decisions reached in its project on accounting for repurchase agreements ("repos"). The board confirmed its previous decisions on the project and indicated it will issue an exposure draft for public comment later this quarter. The comment letter period will end on March 29, 2013. The board also made decisions at this meeting about transition, early adoption, and transition disclosures. This In brief article provides an overview of those decisions.
For repo-to-maturity transactions and repurchase financing transactions involving a repo-to-maturity contract, the board decided on a cumulative-effect approach for transition. This means that an entity will apply the proposed guidance to transactions outstanding as of the effective date with no adjustment to the prior periods presented. The cumulative-effect adjustment will be made to beginning retained earnings as of the date of adoption. Interim and annual periods before the effective date will not be restated.
For all other transactions, the board decided on prospective application. Under this approach, entities will apply the proposed guidance to transactions entered into (or modified) after the effective date. An entity will continue to apply the previous accounting guidance (that is, current U.S. GAAP) to all other transactions until they are settled, modified, or otherwise derecognized. There will be no restatement of prior periods or a cumulative-effect adjustment for these transactions.
The board decided not to permit early application of the proposed guidance since early application provides less consistency among entities. The board also noted that past standards on accounting for repurchase agreements did not permit early application.
The board believes that the disclosures currently required for changes in accounting principle (ASC 250, Accounting Changes and Error Corrections) are sufficient and should be applied by entities in the period the change occurs. As a result, an entity will need to disclose a description of the change in accounting principle, the method of applying the change, and any effects of this change including any effect on the balance sheet.
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.
This project is likely to affect some companies that engage in repurchase agreements or similar transactions. The proposed standard will also affect companies that engage in "repurchase financing agreements" and currently account for the components as a linked transaction.1 While the accounting treatment may not change in many cases, additional disclosures may be required.2
No effective date has been proposed yet.
An exposure draft is expected in December 2012.
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 2012-45, FASB clarifies scope of new repurchase accounting model.
2See In brief 2012-42, FASB determines additional disclosure requirements for repurchase agreements
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