GAAP and IFRS

FASB Votes for Quick Repo Change

The standard setter wants to hear comments about proposed rules on repurchase financing agreements by the end of the summer — so spread the word, s...
Marie LeoneJune 14, 2007

Changing the way companies account for repurchase financing agreements may generate a sizeable amount of public comment in the coming months. But the Financial Accounting Standards Board’s immediate worry is how to get the word out about the proposed changes while operating on a tight schedule.

The FASB members voted unanimously on Wednesday to issue an exposure draft that would rework a narrow sliver of FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The board’s aim is to issue proposed guidance in the form of a FASB Staff Position no later than the second week of July. That would leave constituents between 30 and 45 days (depending on FASB’s comment period deadline) to register their pleasure or disapproval regarding the guidance, dubbed FAS 140-d.

FASB members, as well as FASB staffers working on the project, expressed concern about putting the project on a fast track and not being able to notify affected companies about the short comment period. As a result, the board has asked staffers to “make phone calls” to trade associations, says FASB Project Manager Patricia Donoghue, as part of an outreach program.

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At press time, a list of trade groups were being drawn up, and will likely include organizations like the Investment Company Institute and others that represent the interests of commercial and investment banks, as well as broker/dealers and fund management companies, all companies that frequently use short-term repurchase financing agreements. The outreach effort will give companies “a heads up” that FAS 140-d is on its way, says FASB member Don Young.

Repurchase financing agreements are used to buy and sell overnight loans of Treasuries (sometimes called repos), as well as other short-term transactions, such as those involving securitizations and mortgage-backed securities. The draft guidance should help companies determine whether a pair of repurchase transactions that involve the same counterparties should be “linked,” (treated as one transaction) or “delinked” (treated as two transactions), says FASB.

Under FAS 140, companies can garner the more favorable sale accounting treatment if the pair of repurchase transactions transfers risk and can be legitimately delinked. In that case, the transactions would be identified as a sale, plus another transaction, such as a forward contract, and the sale portion is not recognized on the balance sheet. Single linked transactions that don’t meet the risk-transfer criteria of a sale are treated as a secured loan and booked on the balance sheet.

FAS 140-d would require companies with linked transactions to report the cumulative change on the balance sheet in retained earnings. In addition, companies would have to provide more details in the footnotes about the number of assets and liabilities linked to the repurchase agreements.

The effective date of the FAS 140-d would be for financial statements issued for fiscal years beginning after November 15, 2007, which would likely capture the full 2008 calendar year for most major broker/dealers, and commercial and investment banks, says FASB.