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FASB Proposes New Repurchase Guidance

Tammy Whitehouse | January 15, 2013

Nearly three years after the Lehman Brothers bankruptcy exposed a hole in the accounting rules for repurchase agreements, the Financial Accounting Standards Board has issued a proposal meant to draw a further distinction between true asset sales and secured borrowings.

FASB's proposal would revise Topic 860, Transfers and Servicing, of the Accounting Standards Codification to clarify the guidance around when an asset transfer is a sale and when it's actually a secured borrowing. The Lehman Brothers plunged into bankruptcy in 2008 at the outset of the financial crisis. The bankruptcy examiner concluded in an extensive 2010 report that Lehman Brothers masked billions of dollars in debt as it hurtled toward collapse by describing short-term repurchase agreements as true asset sales, enabling the true debt obligation to be removed from the balance sheet around key financial reporting dates.

FASB addressed the biggest holes in the accounting rules when it issued Accounting Standards Update No. 2011-03 to establish new parameters around when a transfer is a sale or a secured borrowing. FASB's newest proposal is meant to address more recent concerns that current accounting requirements do not yet appropriately reflect a entity's obligations and risks resulting from repurchase agreements, said FASB Chairman Leslie Seidman in a prepared statement. “The Board is seeking stakeholder input on changes intended to ensure that investors are getting useful information about these and similar arrangements,” she said.

Under current GAAP, determining whether a particular financial asset is sold or is a secured borrowing focuses on who has control over the asset. If an asset is sold, it can be removed from the balance sheet, but secured borrowings must remain on the balance sheet. FASB learned from stakeholder input that the current rules sometimes still allow an entity to describe a transfer as sales even when the entity still retains the credit risk associated with the asset. The proposal closes that loophole by eliminating the distinction between agreements that settle before a maturity date and those that settle at the same time as the asset matures, assuring the entity retains control and therefore must describe the agreement as a secured borrowing.

FASB says its proposal provides clarification around when financial assets to be repurchased are “substantially the same,” and therefore subject to on-balance-sheet treatment, and it improves disclosures regarding the effect of repurchase agreements and other similar transfers on the entity's risk profile.

FASB is accepting comments on the proposal through March 29.