FASB Issues Accounting Standards Update On Repos

On Friday, the Financial Accounting Standards Board released an Accounting Standards Update on repos. The full title the document, ASU 2011-03, is: Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements.

As noted in FASB's press release:

The Update is intended to improve financial reporting of repurchase agreements
(“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.

The Board revisited its standards on transfers and servicing to respond to concerns from financial statement users who felt the criteria for determining effective
control for such transactions should be improved,” stated FASB Chairman Leslie
F. Seidman. “The new guidance improves transparency by eliminating consideration
of the transferor’s ability to fulfill its contractual rights and obligations from the criteria in determining effective control.”

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. 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 this Update are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets, as well as implementation guidance related to that criterion.

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