In 2014, the FASB issued amended accounting rules and returns for certain types of repurchase transactions (repo). According to the new guide, certain pension transactions, previously recorded as sales, must now be accounted for in the form of secured bonds. The new rules also require increased publicity. As a result, companies may be required to reduce or eliminate the use of deposits as a means of off-balance sheet financing. While stricter accounting rules are designed to prevent “repo runs” like those that lead to the failure of Lehman Brothers, less use of the pension market could lead to increased volatility in short-term interest rates. Retirement markets offer easy-to-access financing to institutions such as security guards and hedge funds. They also allow institutional investors, such as pension funds and municipalities, to earn a return on excess liquidity. Both their size of several trillion dollars and their role in providing liquidity demonstrate the importance of pension markets. This transaction should be counted as a financing agreement.
The option is classified as a put option, since the customer has the right to exercise the option. The repurchase price is more than the initial asset price and the expected market value of the asset, making the transaction a financing agreement (the client provides financing to the entity). The company recognizes a liability of $1,500 for the consideration received from the customer. If the client exercises the option in three years, the company registers $100 ($1600 to $1,500) in interest charges and withdraws liability. However, if, at the end of the three years, the customer decides not to exercise the option, the company recognizes a turnover of $1500 and cancels the liability. AsU 2014-11 also amends accounting guidelines for pension financing transactions. Under these agreements, the first step is a typical repo in which securities are transferred for cash. Then, in the second stage, the purchaser returns the asset as collateral for cash payment to the assignor and agrees to repurchase the guarantee for a certain amount of cash at a given time. These agreements result in off-balance sheet financing.
Under previous rules, the part of the agreement was considered a sale; It is now likely that such agreements will result in a secured loan that takes into account most repurchase transactions. Generally speaking, a customer has a strong incentive to exercise an option when the repurchase price is expected to exceed the market value of the goods at the time of redemption. Because this assessment requires estimates, management must exercise good judgment in determining the factors that are included in this assessment. On the other hand, if the customer has the right to ask the seller to buy back the assets, it is possible for the customer to take control of the assets recorded and the turnover recorded. In June 2014, the FASB released the 2014-11 Accounting Standards Update (ASU), Transfers and Servicing (theme 860): pension transactions to maturity, pension financing and disclosures. The revised rules require companies to deduct securities repurchase transactions (TMRs) as guaranteed obligations. An RTM is a pension contract by which the securities are due on the same day the pension contract ends. Prior to the update, the FASB made a distinction between a TMR and a pension contract in which the securities had not yet expired upon their return to the original portion. Under the previous rules for the TMR agreements, the cedant was not considered to have effective control over the transferred assets, as he would not recover the assets until they expired. Under these conditions, the RTM agreements were considered outright sales (KPMG Defining Issues, “FASB proposes New Accounting Guidance for Repos,” January 2013, No. 13-6). The obligation to repurchase the securities was not accounted for, so the underlying risk was not on the balance sheet.