FASB Proposes Changes to Accounting for Repos

FASB issued an exposure draft Wednesday that seeks to improve the accounting for repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments address concerns raised during the global economic crisis regarding the necessity and usefulness of the collateral maintenance guidance when determining whether a repo should be accounted for as a sale or as a secured borrowing.


In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. FASB Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets.


The amendments in the Proposed ASU, Transfers and Servicing (Topic 860)—Reconsideration of Effective Control for Repurchase Agreements , are intended to simplify the accounting for these transactions by removing from the assessment of effective control:


  • The requirement that the transferor have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee; and
  • Implementation guidance related to that requirement.


The amendments would be effective for new transfers and existing transactions that are modified as of the beginning of the first interim or annual period after the final ASU’s issuance, which is expected to occur during the first quarter of 2011. An entity would apply the amendments prospectively to transfers that occur after the effective date and existing transactions that are modified after the effective date.


Comments are due Jan. 15, 2011.


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