The Financial Accounting Standards Board has finalized its new accounting rule around repurchase agreements to assure similar transactions receive similar accounting treatment going forward.

FASB issued Accounting Standards Update No. 2014-11 to revise the rules around repurchase-to-maturity transactions, along with repurchase financings and related disclosures. The guidance changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements to align the accounting for other repurchase agreements, which are treated as secured borrowings. The new rule is meant to eliminate the opportunity to treat such transactions as the true sale of an asset, which would enable an entity to remove it from its balance sheet, thus reducing apparent leverage.

A repurchase agreement involves the sale of a security with a simultaneous commitment by the seller to buy the security back at a future date and a predetermined price. The financing transaction is much like a collateralized loan to the party that sells the security. In a repurchase-to-maturity agreement, the agreement terminates at the same time the security matures.

“The new guidance addresses investor concerns about the distinction in GAAP between repurchase agreements that settle at the same time as the maturity of the transferred financial asset, and those that settle any time before maturity,” said FASB Chairman Russ Golden in a statement. “Eliminating that distinction will result in financial reporting that more appropriately reflects the transferor's obligations and risks across similar transactions.”

The accounting fix also brings greater alignment between U.S. and international rules, FASB says. The standard will take effect for interim and annual periods beginning after Dec. 15, 2014, so calendar year companies will begin applying it with the opening of the 2015 reporting year. In addition to aligning the accounting, the ASU requires new disclosure for transactions that are economically similar to repurchase agreements where the entity still carries substantially all of the risk of a transferred asset throughout the term of the transaction. It also expands disclosures about the nature of the pledged collateral.

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