The Financial Accounting Standards Board has closed a loophole in accounting standards that Lehman Brothers is accused of leveraging to hide billions of dollars of debt as it spiraled into bankruptcy.

FASB issued Accounting Standards Update No. 2011-03 to improve the financial reporting of repurchase agreements, also called “repos,” or other transactions that govern the transfer and repurchase of financial assets. The new guidance gives companies some new parameters to consider in determining whether a transfer is in fact a sale of an asset, and therefore qualifies for sale treatment, or whether an entity has retained some control over the asset and therefore cannot claim to have sold it.

Lehman's “Repo 105” and “Repo 108” transactions moved securities off the balance sheet for short intervals around financial reporting dates in 2007 and 2008 to dress up the balance sheet, according to Lehman's bankruptcy examiner. The company relied on a narrow interpretation of Financial Accounting Statement No. 140, which governed when a transaction could be treated as a sale and when it should be treated instead as a short-term financing arrangement. FAS 140 has since been codified into the Accounting Standards Codification.

Financial institutions routinely transfer securities under short-term arrangements to finance immediate liquidity needs. FAS 140 told companies to focus on who controls a particular asset to determine whether its transfer should be treated as a financing arrangement or a sale.

FASB says the new guidance improves the accounting for repos by removing from the assessment of effective control the criteria that requires the transferor to have the ability to repurchase or redeem the financial assets. “The new guidance improves transparency by eliminating consideration of the transferor's ability to fulfill its contractual rights and obligations from the criteria in determining effective control,” said FASB Chairman Leslie Seidman in a statement.

Lehman turned to a U.K. law firm, Linklaters, to get legal opinion supporting its interpretation of U.S. Generally Accepted Accounting Principles and worked with a European broker-dealer to effect the repo transactions. The state of New York has filed a civil suit against Ernst & Young, Lehman's audit firm, claiming helped Lehman commit accounting fraud with the repo transactions. Ernst & Young has promised to mount a full defense.

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