The FASB has issued an exposure draft on Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements designed to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The comment period ends January 15, 2011.
As you are no doubt aware, in a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. Under Topic 860, Transfers and Servicing, an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements, based, in part, on whether the entity has maintained effective control over the transferred financial assets.
The proposed Update is designed to simplify the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets, as well as implementation guidance related to that criterion.
Proposed ASUs are available on the FASB website, www.fasb.org.
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