In brief: FASB amends repo accounting and enhances disclosures

  • Print-friendly version
In brief 06/17/2014 by Assurance services
In brief: FASB amends repo accounting and enhances disclosures

At a glance

FASB amends accounting for repos-to-maturity and repurchase financings. New disclosures required for many transactions.

What happened?

On June 12, 2014, the FASB issued Accounting Standards Update No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to Maturity Transactions, Repurchase Financings, and Disclosures (the “new standard”). The new standard amends the accounting guidance for “repo-to-maturity” transactions and repurchase agreements executed as repurchase financings. In addition, the new standard requires a transferor to disclose more information about certain transactions, including those in which it retains substantially all of the exposure to the economic returns of the underlying transferred asset over the transaction’s term.

Changes in accounting

As a result of the new accounting guidance:

  • Repo-to-maturity transactions will be reported as secured borrowings. Under current accounting rules, these transactions may qualify for sale accounting if certain conditions are met.
  • Transferors will no longer apply the current “linked” accounting model to repurchase agreements executed contemporaneously with the initial transfer of the underlying financial asset with the same counterparty. Under the new standard, the accounting for each transaction instead will be evaluated on a standalone basis. This is expected to result in many of these repurchase agreements being reported as secured borrowings.

Enhanced footnote disclosures: repurchase agreements and securities lending transactions

For repurchase agreements and securities lending agreements accounted for as secured borrowings as of a reporting date, the new standard requires obligors (transferors of collateral) to:

  • disaggregate the related gross obligation by class of collateral pledged, and to disclose the remaining contractual maturity of the agreements, and
  • discuss the potential risks of these arrangements and related collateral pledged, including the risks stemming from a decline in the value of the pledged collateral and how such risks are managed.

Enhanced footnote disclosures: certain transfers of financial assets

The new standard also requires additional disclosures by transferors for transactions that involve a transfer of a financial asset reported as a sale and accompanied by an agreement that results in the transferor retaining substantially all of the exposure to the economic returns of the transferred asset during the transaction’s term.

In these circumstances, the transferor is required to provide the following information, by type of transaction (e.g., repurchase agreement, or a sale accompanied by a total return swap) outstanding at the reporting date:

  • carrying amount of the assets derecognized and the gross amount of proceeds received at the transfer date, and
  • related amounts reported on the balance sheet (e.g., carrying value of the total return swap)

The transferor is also required to provide information about its ongoing exposure to the economic return on the transferred assets, including a description of the arrangements and the risks associated with those arrangements.

Why is this important?

The new standard applies to all companies that finance their activities through repurchase agreements and engage in securities lending activities. Although the new standard makes only targeted changes to the accounting model for these transactions, transferors of collateral under these arrangements will be required to disclose more information about these and similar transactions.

Companies that frequently finance their acquisition of financial assets through contemporaneous repurchase agreements with the same counterparty may be significantly affected by the new accounting requirements. In addition, companies that engage in repo-to-maturity transactions will now need to report them as secured borrowing arrangements.

What's next?

With one exception, public business entities are required to apply the accounting changes and comply with the enhanced disclosure requirements for the first interim or annual reporting period beginning after December 15, 2014. However, for repurchase and securities lending transactions reported as secured borrowings, the new standard’s enhanced disclosures are effective for annual periods beginning after December 15, 2014 and interim periods beginning after March 15, 2015. A public business entity may not early adopt the standard’s provisions.

For all other entities, both the accounting and disclosure provisions are effective for annual periods beginning after December 15, 2014 and for interim periods beginning after December 15, 2015. These entities may elect to early adopt the new accounting standards for interim periods beginning after December 15, 2014.

In all cases, an entity must report changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The new disclosures are not required for comparative periods prior to the effective date.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams who have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-7803).

Authored by:

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

Jeff Allen
Managing Director
Phone: 1-973-236-4400
Email: jeffrey.t.allen@us.pwc.com