Reverse Repurchase Agreement Accounting

Reverse pension arrangements (RRPs) are the end of a repurchase agreement. These instruments are also called secured loans, buy/sell back loans and sell/buy back loans. While the purpose of the repo is to borrow money, it is not technically a loan: ownership of the securities in question actually comes and goes between the parties involved. However, these are very short-term transactions with a guarantee of redemption. In June 2014, the FASB published Accounting Standards Update (ASU) 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The revised rules require companies to account for rebalancing operations (GTRs) as secured credits. An RTM is a repo contract in which securities are due on the same day retirement ends. Prior to the update, the FASB distinguished between a gtr and a retirement transaction for which securities were not yet due on the date of return to the original part. Under previous rules on gtr agreements, it was not considered that the hazard giver did not have effective control over the transferred assets, as it would not recover the assets before they matured. In those circumstances, the RTM agreements were regarded as pure sales (KPMG Defining Issues, `FASB Proposals New Accounting Guidance for Repos`, January 2013, No 13-6). The obligation to repurchase the securities was not recognised, so the underlying risk was not shown on the balance sheet. Under the new rules, the AFSB has decided that, although securities are not returned to the original party due to the maturity of the security, obtaining liquidity at settlement is substantially the same as receiving the securities.

As a result, the treatment of the insured loan is now considered appropriate (Ernst & Young, „FASB Changes Accounting for Certain Repurchase Agreements and Requires New Disclosures,“ Technical Line, No. 2014-12, June 19, 2014). The reverse sales contract is an alternative method to provide liquidity to a portfolio. It is a method to prevent a portfolio from being liquidated to meet unforeseen cash needs. It is also used as an effective cash management practice. In 2014, the AFSB published changes to the accounting rules and information on certain types of repo transactions. Under the new guidelines, certain repo transactions previously recorded as sales must now be accounted for as secured loans. The new rules also require enhanced disclosures. As a result, companies may be asked to reduce or eliminate the use of rest as a means of achieving off-balance-sheet financing. While stricter accounting rules are designed to prevent repo races such as those that lead to the failure of Lehman Brothers, lower use of the rest market could lead to increased volatility in short-term interest rates. Repo markets offer readily available funding to institutions such as securities dealers and hedge funds. They also allow institutional investors such as pension funds and municipalities to earn a return on excess cash..

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