On January 15, 2013, the Financial Accounting Standards Board (FASB) issued a Proposed Accounting Standards Update (the "proposed ASU") that eliminates the distinction between repurchase agreements that settle before the maturity of the transferred asset and those that settle at the same time as the transferred asset matures. As a result, both types of transfers with forward agreements to repurchase the transferred assets, or assets that are substantially similar, at a fixed price would be accounted for as on-balance-sheet secured borrowings. The period for comment on the proposed ASU ends on March 29, 2013.

Transactions such as repurchase agreements and securities lending transactions involve a transfer of a financial asset and a contemporaneous agreement that both entitles and obligates the transferor to repurchase or redeem the transferred asset. A determination of whether a transfer of financial assets in a repurchase agreement is a sale or a secured borrowing often rests on an evaluation of whether the transferor maintains effective control over the transferred asset.

The current accounting guidance provides that a transfer of financial assets cannot be accounted for as a sale if the transferor maintains effective control over the assets that were transferred. One of the conditions required to establish effective control is that the agreement to repurchase or redeem the financial assets must settle before maturity of the transferred asset. A repurchase agreement that settles at the maturity of the transferred assets would fail to satisfy this condition and therefore the transferor would not have effective control over the transferred asset. As a consequence, if the remaining requirements in the guidelines are met, a repurchase agreement that settles at maturity could be accounted for as a sale with an obligation to repurchase.

The proposed ASU eliminates the distinction between repurchase or redemption agreements that settle before the maturity of the transferred asset and those that settle at the same time as the transferred asset matures. As a result, both types of transfers with forward agreements to repurchase the transferred assets or substantially the same assets at a fixed price would maintain the transferor's effective control and would likely have to be accounted for as a secured borrowing.

The proposed ASU also clarifies the characteristics of financial assets that may be considered substantially the same and eliminates the requirement to determine whether repurchase agreements entered into as part of a repurchase financing should be accounted for separately or linked with the initial transfer for accounting purposes. In addition, the proposed ASU incorporates two new disclosures requirements for certain transfers of financial assets with agreements that both entitle and obligate a transferor to repurchase the transferred financial asset from the transferee.

The proposed ASU can be found on the FASB website at:

http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175825664958&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs