In brief: FASB reaches final conclusions on repurchase agreement project (No. 2013-51)

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In brief 12/23/2013 by Assurance services
In brief: FASB reaches final conclusions on repurchase agreement project (No. 2013-51)

At a glance

Final conclusions on repo project, Repos-to-maturity on balance sheet, Change in accounting for repurchase financings, New repo disclosures.

What's new?

At its December 18 meeting, the FASB finalized certain tentative decisions reached at its last meeting, and made significant changes to several others. The Board decided not to move forward with changes related to the accounting for dollar rolls. The Board also decided to retain the disclosures highlighting “asset quality” that were proposed in the exposure draft1 issued in January 2013 (the “Exposure Draft”).

What are the key decisions?

•     Dollar rolls:2 The Board will not amend the existing guidance in ASC 860, Transfers and Servicing.

The Board had discussed providing implementation guidance to clarify the assessment of the “substantially the same” provision within the effective control model for dollar roll transactions.

•     Repos-to-maturity:3 Consistent with the Exposure Draft, repo-to-maturity transactions will be accounted for as secured borrowings. Further, a repo-to-maturity of a held-to-maturity (“HTM”) security would not taint an entity's HTM portfolio.

•     Repurchase financings: 4 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. 

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 repurchase agreement 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.

 

•     Disclosures:  Additional disclosures will be required.  There are separate new disclosure requirements related to:

•     transfers that are accounted for as a sale where the transferor retains substantially all of the exposure to the return of the transferred financial asset through an agreement done in contemplation of the initial transfer with the same transferee, and

•     asset quality information for repurchase and security lending transactions that are accounted for as secured borrowings.

Who's Affected?

The guidance will affect companies that engage in certain repurchase agreements or similar transactions. While in many cases the accounting treatment may not change, additional disclosures may be required.

What's the Effective date?

For public business entities, the amendments will be effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2014. For all other entities, the changes will be effective for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. Early adoption will not be permitted except in the case of an entity other than a public business entity, which may elect to apply the requirements for interims periods beginning after December 15, 2014.

The changes will be implemented on a cumulative-effect basis.

What's next?

The proposed amendments are expected to be issued in the first quarter of 2014.

Questions?

PwC clients that 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 dollar roll is a transaction where the debtor transfers a mortgage-backed security (MBS) to an entity that acts as a secured party (the MBS serves 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 creditor at a future date.
[3] A repo-to-maturity is a repurchase agreement in which the specified repurchase date is the maturity date of the transferred financial asset.
[4] A 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.

 

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