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March 21, 2012

FASB to revise repurchase agreement

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.


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