At its October 2 meeting, the FASB tentatively decided to retain some aspects of the accounting model for repurchase agreements that it proposed in an exposure draft1 issued in January 2013 (the “Exposure Draft”). This is a significant change from the Board’s tentative decision in May 2013 when, after reviewing comment letter feedback, it decided not to modify the accounting for transfers of financial assets and only require additional disclosures.
The FASB made the following tentative decisions in regard to the repurchase agreement accounting model:
When applying the new guidance, certain market standard TBA dollar rolls without stipulations may be accounted for as sales (if the other criteria are satisfied), but a transaction with stipulations would require additional analysis.
Convergence is not a stated goal of this project. This is a FASB-only project involving amendments to ASC 860 under which surrendering effective control is required to achieve sale accounting. IFRS requires a different model which is more of a “risk and rewards” approach that generally results in treating repurchase agreements as secured borrowings.
When released, the guidance may affect companies that engage in certain repurchase agreements, dollar rolls, or similar transactions. While in many cases the accounting treatment may not change, additional disclosures may be required.
The effective date of the proposed amendments has not yet been determined.
The proposed amendments will not be re-exposed; however, the FASB staff will perform limited outreach to constituents to obtain feedback on various aspects to their decisions before finalizing the new standard.
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).
1Proposed Accounting Standards Update, Transfers and Servicing (Topic 860): Effective Control for Transfers with Forward Agreements to Repurchase Assets and Accounting for Repurchase Financings 2A repo-to-maturity is a repurchase agreement in which the specified repurchase date is the maturity date of the transferred financial asset.
3A repurchase financing is the sale of a financial asset with a corresponding transfer of the asset back to the party from whom it was purchased as collateral for a financing transaction.
4A dollar roll is a transaction where the debtor transfers a MBS to an entity that acts as secured party (the MBS serve as collateral) in exchange for cash. At the same time, the debtor enters into an agreement to repurchase a similar but perhaps not identical MBS from the borrower at a future date.