FASB Releases Accounting Standards Update for Repurchase Agreements

The Financial Accounting Standards Board issued Accounting Standards Update No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The Update is intended to improve financial reporting of repurchase agreements 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,” said FASB Chairman Leslie 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 remove the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets from the assessment of effective control, as well as implementation guidance related to that criterion.
The ED is available at http://www.fasb.org/.
Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants.