The US Financial Accounting Standards Board (FASB) has issued a new standard that aims to improve the financial reporting of repurchase (repo) agreements and other similar transactions.
The FASB, a private non-profit organisation designated by the US Securities and Exchange Commission (SEC) to set accounting standards for US public companies, issued Accounting Standards Update No. 2014-10,
Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
, which changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. It also requires enhanced disclosures about repo agreements and other similar transactions.
The new guidance aligns the accounting for repurchase-to-maturity transactions and repo agreements executed as a repurchase financing with the accounting for other typical repo agreements. Going forward, these transactions would all be accounted for as secured borrowings.
The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting.
The new guidance also brings Generally Accepted Accounting Principles (GAAP) into greater alignment with International Financial Reporting Standards (IFRS) for repurchase-to-maturity transactions.
“The new guidance addresses investor concerns about the distinction in GAAP between repo agreements that settle at the same time as the maturity of the transferred financial asset, and those that settle any time before maturity,” said FASB chairman Russell Golden.
“Eliminating that distinction will result in financial reporting that more appropriately reflects the transferor’s [aka repo party’s] obligations and risks across similar transactions.”
The update requires a new disclosure for transactions economically similar to repo agreements in which the repo party retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. It also requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings.
The accounting changes in the update are effective for public companies for the first interim or annual period beginning after 15 December 2014.
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