FASB Accounting for Repurchase Agreements: Understanding the Basics

Repurchase agreements, commonly referred to as repos, are financial instruments that allow firms to obtain short-term cash by selling securities and agreeing to buy them back at a later date. These agreements, which can be used for a variety of reasons including financing and hedging, require accounting treatment in accordance with FASB standards.

The Financial Accounting Standards Board (FASB) is an organization that establishes and improves financial accounting and reporting standards for the preparation of financial statements. Their standard for accounting for repurchase agreements is set out in ASC 860, which provides guidelines for determining when a repo should be accounted for as a sale or as a financing agreement.

Sale versus Financing Agreement

The primary consideration in determining whether a repo should be accounted for as a sale or as a financing agreement is whether the transfer of the security is considered to be a true sale. According to ASC 860, the following criteria must be met for a transfer to be considered a sale:

1. The transferor has surrendered control of the transferred asset

2. The transferor no longer has the ability or obligation to repurchase the transferred asset

3. The transferee has the ability to pledge or sell the transferred asset

4. The transferee has obtained the risks and rewards of ownership of the transferred asset.

If the above criteria are not met, the transfer should be accounted for as a financing agreement. In this scenario, the transferred security is considered to be collateral for the cash received by the transferor. The transferor retains control of the security and has the obligation to repurchase it at the end of the agreement.

While the criteria outlined by ASC 860 may seem straightforward, the determination of whether a transfer is a sale or a financing agreement is ultimately based on judgement. This can lead to differences in interpretation, and firms should carefully consider all relevant factors when accounting for repos.

Disclosure Requirements

Firms that enter into repos are required to disclose certain information in their financial statements. This includes the nature of the repo transactions, the amounts involved, the terms of the agreements, and any collateral pledged as part of the agreements.

Additionally, firms should disclose any risks associated with their repo agreements, including credit risk, market risk, and liquidity risk. This information can be helpful for investors and other stakeholders in evaluating a firm`s overall financial position and risk profile.

Conclusion

Repurchase agreements are a common financial instrument that can provide short-term cash for firms. However, they require careful accounting treatment in accordance with FASB standards. By understanding the criteria for determining whether a repo is a sale or a financing agreement, firms can ensure that they are accurately reflecting their financial position. Additionally, by disclosing relevant information about their repo agreements, firms can provide transparency to investors and other stakeholders.