In brief: FASB proposes amendments to repurchase agreement accounting model (No. 2013-02)
In brief
What's new?
On January 15, 2013, the FASB issued an exposure draft to amend the accounting for repurchase agreements (aka “repos”) in an effort to identify those transactions that should be accounted for as a secured borrowing and to improve the associated accounting and disclosure requirements.
This project began from a request that the FASB review the accounting for a particular type of repurchase agreement referred to as a repo-to-maturity1. As part of its research, the FASB staff engaged in discussions with financial statement users, preparers, and accounting firms to better understand these transactions and the associated accounting.
What are the key provisions?
The proposed amendment would require that a transfer of an existing financial asset with an agreement that both entitles and obligates the transferor to repurchase or redeem the transferred asset from the transferee with all of the following characteristics be accounted for as a secured borrowing:
- The financial asset to be repurchased at settlement of the agreement is identical to or substantially the same as the financial asset transferred at inception or, when settlement of the forward agreement to repurchase or redeem the transferred assets is at maturity of the transferred assets, the agreement is settled through an exchange of cash (or a net amount of cash).
- The repurchase price is fixed or readily determinable.
- The agreement to repurchase the transferred financial asset is entered into contemporaneously with, or in contemplation of, the initial transfer.
As a result, repo-to-maturity transactions, which may currently be accounted for as sales with an obligation to repurchase, are now likely to be accounted for as secured borrowings. Arrangements that do not meet the above criteria will be evaluated under the existing guidance for transfers of financial assets.
The FASB also proposes certain clarifications to the characteristics to qualify as “substantially the same.”
Repurchase financing agreements
The proposed amendment eliminates the current model for repurchase financings that are defined as a transfer of a financial asset back to the party from whom it was purchased as collateral for a financing transaction. The current model requires a determination of whether repurchase agreements entered into as part of a repurchase financing should be accounted for separately or as a linked transaction. This amendment will require that the initial transfer and repurchase agreement be evaluated separately under the sale accounting criteria.
Disclosures
The proposal requires additional disclosures for repurchase agreements and similar transactions depending on if the transaction is treated as a sale or a secured borrowing. Refer to In brief 2012-42, FASB determines additional disclosure requirements for repurchase agreements, for more discussion of the new disclosures.
Transition
For transfers with forward repurchase agreements that settle at the maturity of the transferred financial asset (repos-to-maturity) and repurchase financings that involve such agreements, the proposed guidance would be applied by recording a cumulative effect adjustment to beginning retained earnings as of the date of adoption. For all other transactions, entities would apply the proposed guidance prospectively to transactions entered into or modified after the effective date.
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 certain types of repurchase agreements, including repos-to-maturity. The proposed standard will also affect companies that engage in repurchase financing agreements and currently account for the components as a linked transaction. The proposed additional disclosures will impact all companies who engage in repurchase transactions
What's the effective date?
The FASB will establish the effective date when it issues the final amendments.
What's next?
Comments on the FASB's exposure draft are due March 29, 2013.
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).
1A repo-to-maturity is a repurchase agreement in which the specified repurchase date is the maturity date of the transferred financial asset.
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
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