The US Financial Accounting Standards Board
(FASB) is planning to revise repurchase agreement (repos)
standard.
FASB first updated its rules last year
responding to the Repo 105 misconduct, identified as one of the
reasons which lead to the collapse of Lehman Brothers.
During a meeting this week, FASB chairman
Leslie Seidman said investors have raised further concerns over the
existing standard on repurchase agreements should be reconsidered
to reflect changes in market practices.
“The Board will reconsider both the accounting
and disclosure requirements to ensure that investors are getting
useful information about repurchase arrangements,” Seidman
said.
An FASB spokesperson told The
Accountant it plans to explore the potential opportunity to
fully converge the accounting for repurchase agreements and similar
transactions in US GAAP with IFRS, as well as look at opportunities
for the simplification of accounting guidance in this area.
What is a repurchase
agreement?
Repurchase agreements involve shared rights to
transferred financial assets and are difficult to characterise
because they possess attributes of both sales and secured
borrowings.
In determining whether such transactions are
sales or secured borrowings, the existing accounting framework
focuses on which party has control over the transferred financial
assets based on the rights and obligations held by each party.
This model is largely preserved prevailing
practice used to distinguish between agreements viewed by market
participants as financings from those viewed as sales of financial
assets with a concurrent forward agreement, a derivative.
However, the FASB explained over time market
practices have changed, including collateral posting practices and
the types of securities transferred in these arrangements thus the
need to amend the repurchase agreement standard.
Misconduct of the use of repos was exposed in
early 2010 when a US court appointed investigator alleged that
Lehman Brothers used the Repo 105 accounting rule to allow the bank
to temporarily move $36bn off its balance sheet in August 2007 and
$50bn in the second quarter of 2008.
