FASB
changes
rules on
repos
to that criterion.
In explaining the differences
from International Financial Re-
porting Standards, FASB noted that
the consideration of a transferor’s
ability to repurchase or redeem fin-
ancial assets transferred on sub-
stantially agreed terms, even in the
event of default by the transferee,
is not required under IFRS. The
amendments in the FASB update
improve convergence, the board
said, by eliminating from U.S. GAAP
the need to consider this criterion.
The Financial Accounting Stan-
dards Board has issued an Accounting Standards Update that would
revise the rules for how companies
can deal with repurchase agreements like the kind Lehman Brothers used to temporarily move billion
of dollars of assets off its books before reporting its quarterly results.
ASU No. 2011-03, Transfers and
Servicing ( Topic 860): Reconsideration of Effective Control for Repurchase Agreements, is intended to
improve the 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.
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.
Lehman Brothers’ use of so-call-ed “Repo 105” repurchase transactions was cited as one of the causes
of its collapse in 2008. The bank’s
former auditor, Ernst & Young, has
been the subject of lawsuits by former Lehman investors and the New
York State Attorney General.
The amendments in the standards 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
NORWALK, CONN.
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