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FASB Sets New Determinations on Accounting Treatment of Repurchase Agreements

Friday, August 05, 2011 - Jaime R. Boone, CPA & Daniel Alonso

Jaime Boone
Daniel Alonso

During the final months of 2011, banks will need to begin preparing for compliance with a recent Financial Accounting Standards Board requirement on the accounting treatment of repurchase agreements.

The FASB issued Accounting Standards Update (ASU) No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements on April 29.

The ASU establishes new determinations on whether the accounting treatment should be a sale or a financing on repurchase agreements, generically known as repos, and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.

Among community banks, it is common to arrange short-term repurchase agreements in which government securities are traded in return for cash. Short-term sales and repurchases of a portion of a loan to another bank also are subject to accounting rules for repurchases.

Banks should review new contracts and existing repo contracts to be certain that they meet the requirements of ASU 2011-03.

Under ASU 2011-03, the transferor's maintaining of effective control of the financial asset remains the determining factor as to whether it can account for the repo as a sale of assets.

The FASB concluded that the assessment of effective control should focus on a transferor's contractual rights and obligations with respect to transferred financial assets, not on whether the transferor has the practical ability to perform in accordance with those rights or obligations.

In an important change, the ASU removed two criteria that previously had been used in determining effective control:

  • The criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee.
  • The collateral maintenance implementation guidance related to that criterion.

Other criteria applicable to the assessment of effective control are not changed by the amendments in the ASU.

Those criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity if all of the following conditions are met:

  1. The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred.
  2. The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price.
  3. The agreement is entered into contemporaneously with, or in contemplation of, the transfer.

If a repo does not meet sale accounting treatment and is to be accounted for as a secured borrowing, the transferor shall continue to report the transferred asset on its balance sheet in accordance with FASB 860, Transfers and Servicing.

The amendments in the ASU are effective for public and private entities for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted.

To contact Jaime R. Boone e-mail jboone@mbafcpa.com or call 1-800-239-1474. To contact Daniel Alonso, e-mail dalonso@mbafcpa.com or call 1-800-239-1474.

The purpose of this newsletter is to provide general information on tax, audit and other issues related to the financial services industry. The information contained herein may not apply to all institutions or organizations and their specific circumstances. Financial services organizations are encouraged to consult directly with an accounting expert before making tax and accounting decisions.