Gaap Repurchase Agreements

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A repurchase agreement usually involves the transfer of securities for cash. The amount of money transferred depends on the market value of the securities, net of a declared percentage intended to be used as a cushion. This cushion, called “haircut,” protects the purchaser if the securities need to be liquidated to be repaid. In addition, the ceding company agrees to buy back the securities at a higher price at a later date. The repurchase price is generally higher than the initial price paid by the purchaser, the difference being interest. Since the seller is contractually obliged to repurchase the securities at an agreed price, he retains much of the risk of ownership. In addition to the information required by CSA 860, the proposed ASU would require companies to disclose from each closing date (1) the “gross amount of total borrowing, broken down by default” for deposits recorded in secured bonds and (2) the book value of assets recorded during the reference period only because the assets repurchased did not meet the same requirements. In June 2014, the FASB released the 2014-11 Accounting Standards Update (ASU), Transfers and Servicing (theme 860): pension transactions to maturity, pension financing and disclosures. The revised rules require companies to deduct securities repurchase transactions (TMRs) as guaranteed obligations. An RTM is a pension contract by which the securities are due on the same day the pension contract ends. Prior to the update, the FASB made a distinction between a TMR and a pension contract in which the securities had not yet expired upon their return to the original portion. Under the previous rules for the TMR agreements, the cedant was not considered to have effective control over the transferred assets, as he would not recover the assets until they expired. Under these conditions, the RTM agreements were considered outright sales (KPMG Defining Issues, “FASB proposes New Accounting Guidance for Repos,” January 2013, No.

13-6). The obligation to repurchase the securities was not accounted for, so the underlying risk was not on the balance sheet. Under the new rules, the FASB has decided that, although the securities are not returned to the original party due to the maturity of the security, obtaining liquidity at the time of liquidation is essentially the same as receiving the securities. Secure credit accounting is therefore considered appropriate (Ernst and Young, “FASB Changes Accounting for certain Repurchase Agreements and Requires New Disclosures,” Technical Line, No. 2014-12, June 19, 2014). Because some deposits are settled at the maturity of the transferred assets, they do not meet the repurchase requirement before maturity, so that the ceder does not retain any effective control. If the remaining conditions of de-accounting in CSA 860 are met (i.e. the isolation and the right of the purchaser to wage or exchange the assets), the rights payable at maturity would be counted as a sale with a forward redemption contract (i.e. a derivative valued at fair value by the net result).

However, the FASB considers that such accounting “does not clearly provide sufficient information on a company`s risks [and] could potentially mask the company`s liquidity needs to meet the obligations arising from these transactions.” The proposed guidelines would eliminate current CSA 860 guidelines for pension financing operations. Under the current guidelines, there is a reedative presumption that an initial transfer and buy-back financing concluded simultaneously with or in the economic phase between them would be considered to be related to each other and could therefore be considered derivatives if the assignor regained effective control over the assets initially transferred through a buyback.

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