On January 15, the Financial Accounting Standards Board (FASB) issued a proposed accounting standards update (ASU) that clarifies Effective Control for Transfers with Forward Agreements to Repurchase Assets and Accounting for Repurchase Financings.
The main objective in developing this proposal update is to: (a) clearly identify repurchase agreements, securities lending transactions, and other transactions that involve a transfer of a financial asset and an agreement that both entitles and obligates the transferor to repurchase or redeem the transferred asset that should be accounted for as financing transactions and (b) improve the accounting and disclosures for those transactions.
The following characteristics are indication of a secured borrowing transaction:
• The financial asset to be repurchased at settlement of the agreement is identical to or substantially the same as the financial asset transferred at inception or, when settlement of the forward agreement to repurchase or redeem the transferred assets is at the maturity of the transferred assets, the agreement is settled through an exchange of cash.
• The repurchase price is fixed or readily determinable.
• The agreement to repurchase the transferred financial asset is entered into contemporaneously with, or in contemplation of, the initial transfer.
If the agreement does not match any of the characteristics above, the transferor’s effective control over the transferred asset would not be maintained, and the transferor would be required to assess the transfer under the remaining derecognition conditions as set forth in paragraph 860-10-40-5 of the current guidance.
The proposed amendment will impact both public and nonpublic entities. Although an effective date has not been determined, the FASB has proposed that some agreements will require a cumulative-effect adjustment to retained earnings and some will be accounted for prospectively.
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