The FASB met on May 23, 2013 to discuss feedback received on its repurchase agreement proposal1. Based on the feedback received, the FASB tentatively decided to retain the current effective control model and require additional disclosures for transfers of financial assets with contemporaneous agreements that result in the transferor retaining the risks associated with the transferred financial asset.
This decision is a significant change from the proposal, which would have required a change in the accounting for a particular type of repurchase agreement referred to as a repo-to-maturity2. Under current guidance, these transactions are treated as sales with agreements to repurchase. Under the proposal, they would have been treated as secured borrowings.
The objective of the proposal was to identify repurchase transactions that should be accounted for as secured borrowings and to improve the associated accounting and disclosure requirements. The proposal was issued in response to concerns raised by stakeholders about the accounting for certain repurchase transactions. Under the proposal, repo-to-maturity transactions, which may currently be accounted for as sales with an obligation to repurchase, would likely have been accounted for as secured borrowings. Refer to In brief 2013-02, FASB proposes amendments to repurchase agreement accounting model, for more information on the proposal.
The FASB received twenty-three comment letters on the proposal. The majority of respondents did not agree with the proposal as they were concerned that it lacked a clear principle and therefore would result in inconsistent accounting for economically similar transactions. Respondents also noted that the scope of the proposal was not clear and would need to be clarified. Further, the FASB received a number of comments questioning the decision-usefulness of the proposed disclosures.
In light of the feedback received, the FASB tentatively decided to address the objective of proposal through additional disclosures rather than changing the accounting for these transactions. The FASB noted that the disclosures proposed under this project, paired with existing disclosure requirements under ASC 815, Derivatives and Hedging, would provide increased transparency into these transactions.
While this is a FASB-only project, it could result in enhanced disclosures that would focus on transactions where the transferor maintains "risks and rewards" over transferred financial assets. 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 certain types of repurchase agreements, including repos-to-maturity, as well as economically similar transactions that provide the transferor with risks and rewards over the transferred financial asset.
The FASB will establish the effective date based on the results of future deliberations.
The FASB staff will begin developing a disclosure package for the FASB to deliberate at a future meeting. The FASB will determine the need to issue a revised proposal based on the results of those future deliberations.
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).
1 Proposed Accounting Standards Update, Transfers and Servicing (Topic 860): Effective Control for Transfers with Forward Agreements to Repurchase Assets and Accounting for Repurchase Financings
2 A repo-to-maturity is a repurchase agreement in which the specified repurchase date is the maturity date of the transferred financial asset.