Capital Markets Accounting Developments Advisory 2011-1

January 2011
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Capital Markets Accounting Developments Advisory 2011-1: Analysis of Proposed ASU Topic 860 – Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements

At a glance

This Capital Markets Accounting Developments Advisory (“CMADA”) describes the proposed change and its potential impact on current practice by discussing the proposed ASU and its impact on US GAAP. It also discusses how the changes affect convergence with International Financial Reporting Standards (“IFRS”).

January 12, 2011
Analysis of Proposed ASU Topic 860 – Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements

On November 3, 2010, the FASB issued Proposed Accounting Standards Update, Reconsideration of Effective Control for Repurchase Agreements (the “proposed ASU”). The objective of the proposed ASU is to improve the accounting for repurchase agreements (a “repo”) and other similar agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their stated maturity.

In a typical repo, transferor transfers financial assets and has an agreement with the transferee to repurchase the same or substantially the same financial assets for a fixed price in the future.

The proposed guidance would modify the transferor’s assessment of whether a transferor maintains effective control over transferred financial assets. Under current guidance, this assessment includes a determination of the sufficiency of collateral for a repo transaction at inception and over its term.

The proposed guidance would make the sufficiency of collateral irrelevant to the accounting treatment for the transfer of financial assets. The proposed guidance is expected to expand the number and types of transactions that are accounted for as secured borrowings.

This Capital Markets Accounting Developments Advisory (“CMADA”) describes the proposed change and its potential impact on current practice by discussing the proposed ASU and its impact on US GAAP. It also discusses how the changes affect convergence with International Financial Reporting Standards (“IFRS”).