Monday, February 4, 2013

FASB Tries to Eliminate Shenanigans When Accounting for Repos


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

At this point, we're basically saying all repos should be accounted for as borrowings.
FASB Chairman Leslie Seidman

On January 15, 2013, the Financial Accounting Standards Board (FASB) proposed changes to accounting standards for repos intended to improve financial reporting disclosures and more properly reflect a company's obligations and risks. They also will clarify guidance for distinguishing between transactions that are essentially sales that can be moved off the balance sheet and on-balance sheet secured borrowings. 


Reexamining accounting for repos became a priority to the FASB as a result of loopholes in the existing accounting standards that allowed Lehman and MF Global to classify some of their repo transactions as sales. Authorities say that mislabeling certain classes of repos allowed Lehman and MF Global to account for them off-balance sheet, making them look less in debt than they actually were. The FASB's new proposal clarifies that repo securities (agreements to exchange financial assets for cash and to buy back the asset at a later date) should in most cases be treated as “borrowings,” not “sales” on corporate balance sheets. 


The new guidance would also change accounting for "repos to maturity," a variant of traditional repos used extensively by MF Global in which the termination date of the repo transaction itself is the same as the maturity of the underlying security. Under current standards, "repos to maturity" can be treated as sales and not reflected on a company's balance sheet. The new proposed accounting guidelines would eliminate this special treatment and require that repos to maturity be classified as borrowings and reflected as such on a company's financial statements. 


The new proposal could affect the accounting for many industries. Investment funds, insurance companies, and banks both large and small use repos routinely for short-term borrowing and to earn marginal returns on the securities while they are sitting idle on their books. While the proposed new treatment of repos may take some measure flexibility away from these institutions in the way they structure and account for the transactions, the new standards will make the lives of CCOs and investors that much easier by taking away some of the judgmental aspects and potential for abuses present under the current standards.  


Comments on the FASB's proposal are due by March 29, 2013.  


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