In brief: FASB makes further decisions on repurchase agreement accounting (No. 2012-33)

In brief 08/02/2012 by Assurance services

The FASB tentatively decided this week to extend a previously proposed exception to the financial asset sale accounting rules for certain sale and repurchase agreements. The proposed exception will require secured borrowing accounting for transactions that involve the sale and repurchase of identical financial assets and similar, but not identical, financial assets. In determining what is similar but not identical, the FASB decided to utilize the existing criteria (with some clarifications) for determining whether the financial asset to be repurchased is substantially the same as the asset transferred. This In brief article provides an overview of the FASB's decisions at this week's board meeting.

What's new?

The FASB tentatively decided this week to extend a previously proposed exception to the financial asset sale accounting rules for certain sale and repurchase agreements. The proposed exception will require secured borrowing accounting for transactions that involve the sale and repurchase of identical financial assets and similar, but not identical, financial assets. In determining what is similar but not identical, the FASB decided to utilize the existing criteria1 (with some clarifications) for determining whether the financial asset to be repurchased is substantially the same as the asset transferred.

The FASB decided that the existing derecognition criteria to qualify for sale accounting should be applied to repurchase agreements and similar transactions that do not meet the criteria for secured borrowing accounting. The FASB also intends to clarify the application of the “legal isolation” condition for repurchase agreements.

What are the key decisions?

At a previous meeting, the FASB decided that a repurchase agreement involving the sale and repurchase of an identical financial asset that meets the following six criteria would be accounted for as a secured borrowing:

  • It involves a transfer of existing financial assets at the inception of the agreement.
  • It involves both a right and an obligation to repurchase the financial assets.
  • The initial transfer and forward repurchase agreement involve the same counterparty
  • The agreement to repurchase the financial assets is entered into contemporaneously, or in contemplation of, the initial transfer.
  • The repurchase price is fixed or readily determinable.
  • The financial assets specified under the forward repurchase agreement are identical to the financial assets transferred at inception.

This "exception" would require these transactions to be accounted for as secured borrowings. In other words, they would not be analyzed under the existing derecognition criteria to qualify for sale accounting. The FASB decided that specifying the types of repurchase agreements that should be accounted for as secured borrowings would expeditiously address constituent feedback and achieve greater consistency in the accounting for these transactions. Refer to In brief 2012-19, FASB tentatively agrees on approach for repurchase agreement accounting, for further details from this meeting.

At its August 1 meeting, the FASB tentatively decided to extend this exception to repurchase agreements with the six characteristics above that involve similar, but not identical, financial assets. As a result, repurchase agreements that involve a purchase of an asset that is "substantially the same" as the financial asset initially transferred would be accounted for as secured borrowings.

The FASB also discussed the characteristics to qualify as "substantially the same" and indicated that the financial asset that was transferred and the financial asset to be repurchased would need to be "very similar" to meet these criteria. The FASB decided to make minor clarifications to the existing criteria to reinforce the need for a full analysis. Additional disclosures about a company’s conclusions with regard to the "substantially the same" criteria would also be required.

To the extent that a repurchase agreement does not meet all of the criteria for the secured borrowing exception, the FASB indicated that the transaction should be evaluated under the existing derecognition criteria. This would include analysis of legal isolation and the transferee's ability to freely pledge or exchange the transferred asset.

Is convergence achieved?

While this is a FASB-only project, it could result in greater consistency in the accounting for repurchase transactions under U.S. GAAP and IFRS, even though the underlying approach differs. IFRS requires a “risk and rewards” approach that generally results in treating repurchase agreements as secured borrowings.

Who's affected?

This project is likely to affect some companies that engage in repurchase agreements or similar transactions. While the accounting treatment may not change in many cases, additional disclosures may be required.

What's the effective date?

No effective date has been proposed yet. The effective date will likely depend on the extent of the proposed changes and the amount of time companies will need to implement those changes.

What's next?

The FASB will discuss possible additional disclosures for repurchase agreements and similar transactions at a future meeting. An exposure draft is expected during the fourth quarter of 2012.

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).

1The criteria for determining whether the financial assets to be repurchased are substantially the same as the financial assets initially transferred are included in ASC 860-10-40-24(a).

Authored by:

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

Mary Perrotta
Director
Phone: 1-973-236-7575
Email:mary.b.perrotta@us.pwc.com

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