In response to concerns from stakeholders, FASB on Wednesday added repurchase agreements and similar transactions to its agenda.
In repurchase agreements, an entity transfers financial assets with an agreement that entitles and obligates the transferor to repurchase the financial assets at a fixed price at a later date.
If the transferor maintains control of the financial assets, the transaction is accounted for as a secured borrowing, and the transferred security is not derecognized. If control is deemed to be passed to the transferee, the transferor must derecognize the transferred asset and recognize a separate forward repurchase commitment.
FASB Accounting Standards Update No. 2011-3, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements, which was issued in April 2011, removed from the assessment of effective control the requirement that the transferor have the ability to repurchase or redeem the financial assets.
FASB staffer Rosemarie Sangiuolo said during Wednesday’s board meeting that the project that led to that update was narrow in order to expeditiously resolve a specific practice issue.
“During the course of that project, other issues were raised by constituents that were beyond the scope of that project,” Sangiuolo said. “Constituents noted practice issues related to other elements of the effective control guidance, particularly the interpretation of the criterion for assessing whether the financial assets to be returned are substantially the same as the transferred financial assets.”
Sangiuolo said users of financial statements identified the need to improve existing disclosure requirements for such transactions. She said users of financial statements view repurchase agreements as financing transactions, or secured loans of cash, and indicated that all repurchase agreements should be accounted for as secured borrowing because the transferor retains the credit risk of the transferred assets.
FASB staffers believe the issues are troublesome to the users of financial statements and present an opportunity for convergence with IFRS. Discussion by FASB is expected to begin within four to six weeks.
—Ken Tysiac ( firstname.lastname@example.org ) is a JofA senior editor.
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