Recently, the Division of Corporation Finance’s Office of Chief Accountant (“CFOCA”) published another "Dear CFO" letter, this time providing disclosure guidance to issuers relating to repurchase agreements, securities lending transactions or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets. The Staff had previously sent letters tailored letters to the Chief Financial Officers of nearly two dozen financial and insurance companies.
CFOCA issues dear CFO letters to provide guidance to issuers in advance of their periodic filings when the Staff has been focusing on particular disclosures. Prior examples include fair value accounting and loan loss reserves. The issuance of this particular "Dear CFO" letter is probably the result of a bankruptcy examiner’s revelations that Lehman may have used repurchase agreements to hide $50 billion in debt.
The letter addresses accounting and disclosure for repurchase agreements, securities lending transactions or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets. Specifically, the Staff asks whether any of these types of transactions have been accounted for as sales as opposed to collateralized financings. The Staff is looking for three years of historical data about these agreements along with additional detail supporting the sale accounting determination. The Staff is also seeking a justification as to why more disclosure was not provided in MD&A.