In brief: FASB changes course on repurchase agreement project (No. 2013-43)

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In brief 10/04/2013 by Assurance services
In brief: FASB changes course on repurchase agreement project (No. 2013-43)

At a glance

The FASB decided to retain some aspects of the accounting model for repo agreements in its January 2013 exposure draft -- a significant change from its prior decisions.

What's new?

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.

What are the key decisions?

The FASB made the following tentative decisions in regard to the repurchase agreement accounting model:

  • Repos-to-maturity2: The Board decided to require repo-to-maturity transactions to be accounted for as secured borrowings.
  • Repurchase financings3: Under current guidance, repurchase agreements entered into as part of a repurchase financing may be required to be accounted for on a “linked” basis with the original transfer and analyzed as a single transaction. As a result, the purchaser may account for the transaction as a derivative instrument as opposed to a purchase and a financing. Consistent with the Exposure Draft, the Board decided to eliminate the current model for repurchase financings and require that repurchase agreements be accounted for separate from the original transfer.
  • “Substantially the same” guidance: The Board decided to add new implementation guidance to clarify the assessment of the substantially the same characteristics within the effective control model for dollar roll4 transactions involving the transfer of an existing agency mortgage-backed security and a forward To Be Announced (TBA) repurchase agreement. The implementation guidance would indicate that a forward TBA dollar roll without trade stipulations would not be expected to result in the return of a substantially the same financial asset, but a forward TBA dollar roll with stipulations might.

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.

  • The Board also determined that additional disclosures will be required for certain transfers accounted for as sales by transaction type, including:

    -  the carrying amounts of assets derecognized as of the date of the initial transfer in transactions for which an agreement with the transferee remains outstanding at the reporting date,

    -  information about the transferor’s ongoing exposure to the transferred financial assets, including a description of the arrangements that result in the transferor retaining exposure to the transferred financial assets, the risks related to those assets to which the transferor remains exposed, and the maximum exposure related to those assets (fair value of assets derecognized), and

    -  amounts recorded in the financial statements related to agreements accounted for as sale (i.e., the forward purchase commitment accounted for as a derivative), with a cross reference to the disclosures required by ASC 815, Derivatives and Hedging.

Is convergence achieved?

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.

Who's affected?

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.

What's the effective date?

The effective date of the proposed amendments has not yet been determined.

What's next?

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.

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).

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.

Authored by: 

Chip Currie
Partner
Phone: 1-973-236-5331
Email: frederick.currie@us.pwc.com

Kristin Derington-Ruiz
Senior Manager
Phone: 1-973-236-7093
Email: kristin.derington-ruiz@us.pwc.com