Changes to Accounting for Repurchase Agreements

David F. Salerno, PhD, CPA, John A. Ruddy, CPA, CFA, and Murli Rajan, PhD, CFA

In 2014, FASB issued amended accounting rules and disclosures for certain types of repurchase (repo) transactions. Under the new guidance, certain repo transactions previously accounted for as sales must now be accounted for as secured borrowings. The new rules also require increased disclosures. As a result, companies may be required to reduce or eliminate the use of repos as a means of achieving off–balance sheet financing. While more stringent accounting rules are designed to prevent repo runs like those that lead to the failure of Lehman Brothers, decreased use of the repo market could lead to increased short-term interest rate volatility. The repo markets afford readily available financing to institutions such as security dealers and hedge funds. They also allow institutional investors, such as pension funds and municipalities, to earn a rate of return on excess cash. Both their multitrillion-dollar size and their role in providing liquidity are indicative of repo markets' importance.