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Amended repurchase guidance affects asset managers

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For registered investment advisers (RIAs), additional disclosure will need to be added to the notes of the financials for entities with repurchase-to-maturity transactions. This is due to FASB’s efforts to increase transparency via Accounting Standards Update No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures (the ASU). The ASU amended Accounting Standards Codification Topic 860, Transfers and Servicing (ASC 860), which provides guidance on accounting for certain repurchase agreements (repos).

ASU 2014-11:

  • Requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements)
  • Eliminates accounting guidance on linked repurchase financing transactions
  • Expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales
  • Expands disclosure requirements related to certain transfers accounted for as secured borrowings (specifically, repos, securities lending transactions and repurchase-to-maturity transactions)
  • Although this guidance was issued in 2014, we are beginning to see the first financial statements affected by the amendments.

Amended repurchase guidance impacts asset managers webchart 1

Amended repurchase guidance impacts asset managers webchart 2

Repurchase-to-maturity transactions accounted for as secured borrowings

The ASU states that repos and securities lending transactions should be accounted for as secured borrowings if they do not meet ASC 860’s derecognition criteria. Both public and nonpublic businesses should apply the guidance by using a cumulative-effect approach to account for transactions that are outstanding at the beginning of the adoption period.

The ASU also prohibits entities from accounting for repurchase-to-maturity transactions as sales. A repurchase-to-maturity transaction is a repo that settles at the maturity of the transferred financial asset and does not require the transferor to reacquire the transferred financial asset. These transactions should be accounted for as a secured borrowing as if the transferor maintains effective control (they were previously considered to have surrendered control since the transferred financial asset was never reacquired).

Linked repurchase financing transactions

The ASU eliminates ASC 860’s previous guidance on repurchase financing transactions and requires the transferor and transferee to simultaneously account for the initial transfer of the financial asset as a purchase and sale (assuming derecognition conditions are met). In addition, the ASU requires entities to evaluate and account for the repurchase component of the combined transaction in the same way they would evaluate and account for other typical repurchase agreements. This may reduce some of the cost and complexity of these transactions, since more repurchase financing transactions will be accounted for as secured borrowings due to the elimination of the requirement to evaluate a presumption of linkage.

Maintaining effective control

Under the amended guidance, an entity that determines it does not maintain effective control over the transferred financial asset still needs to meet the remaining derecognition criteria (i.e., legal isolation and the right to pledge or exchange) to qualify for sale accounting. The ASU also states that agreements to repurchase financial assets should be accounted for as secured borrowings, as long as they meet either the effective-control criteria or repurchase-to-maturity exception.

Disclosure requirements

The ASU defines new disclosure requirements for certain transfers of financial assets accounted for as sales and collateral supporting repos, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings.

Certain transfers accounted for as sales

The ASU requires additional disclosures regarding transactions accounted for as sales that are a transfer of financial assets to a transferee or are an agreement in advance of an initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction.

The ASU clarifies that this disclosure requirement applies to the following types of transactions:

  • Transfers of financial assets with an agreement to repurchase the transferred financial asset (or a substantially the same financial asset) before maturity at a fixed or determinable price that will be settled in a form other than the return of the transferred financial asset (for example, the transaction is cash-settled).
  • Transfers of financial assets with an agreement that requires that the transferor retain substantially all of the exposure to the economic return on the transferred financial asset (for example, a sale with a total return swap).

The ASU excludes dollar-roll transactions that qualify for sale accounting and transactions that are subject to other disclosure requirements (i.e., securitizations, asset-backed financing arrangements and similar transfers that meet certain criteria).

For outstanding transactions as of the reporting date that fall within the scope of this disclosure requirement, the amended guidance requires an entity to disclose the following:

  • The carrying amount of assets derecognized as of the date of derecognition. If the derecognized amounts have changed significantly from those derecognized in prior periods or are not representative of the activity throughout the period, the entity must include a discussion of the reasons for the change.
  • The amount of gross cash proceeds received by the transferor for the assets derecognized as of the date of derecognition.
  • Information about the transferor’s ongoing exposure to the economic return on the transferred financial assets, disclosed by type of transaction (e.g., repo, securities lending arrangement, or sale and total return swap). The information should include:
    • The fair value of assets derecognized by the transferor as of the reporting date
    • The amounts reported in the statement of financial position arising from the transaction (e.g., the carrying value or fair value of forward repurchase agreements or swap contracts)
    • A description of the arrangements that result in the transferor retaining substantially all of the exposure to the economic return on the transferred financial assets and risks related to those arrangements

Amended repurchase guidance impacts asset managers webchart 3

Certain transfers accounted for as secured borrowings
To enhance the transparency of collateral supporting repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings, the new guidance requires entities to disclose:

  • A disaggregation of the gross obligation by the class of collateral pledged. The appropriate level of disaggregation and classes should be presented based on the nature, characteristics and risks of the collateral pledged.
  • The remaining contractual maturity of the repurchase agreements, securities lending transactions and repurchase-to-maturity transactions.
  • A discussion of potential risks associated with the agreements and pledged collateral (i.e., obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed).

Amended repurchase guidance impacts asset managers webchart 4

Conclusion
Although this amended guidance was passed in 2014, RIAs are now beginning to prepare financial statements under the new structure. If you have questions regarding your own statements, please contact Grant Thornton LLP.

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Contacts
Michael Patanella
Audit Partner
U.S. Asset Management Sector Leader
T +1 212 624 5258

Joseph Magri
Senior Manager
Financial Services Audit
T +1 212 624 5380