On the other hand, if the company has the obligation to buy back the asset at the request of the customer and the repurchase price is lower than the initial sale price, we can analyze that the customer has no incentive to exercise the repurchase option, so it is very likely that the option will not be exercised. in this case, the transaction must be recognized as the sale of a product with a right of return. In 2014, the AFSB published changes to the accounting rules and information on certain types of repo transactions. Under the new guidelines, certain repo transactions previously recorded as sales must now be accounted for as secured loans. The new rules also require enhanced disclosures. As a result, companies may be asked to reduce or eliminate the use of rest as a means of achieving off-balance-sheet financing. While stricter accounting rules are designed to prevent repo races such as those that lead to the failure of Lehman Brothers, lower use of the rest market could lead to increased volatility in short-term interest rates. Repo markets offer readily available funding to institutions such as securities dealers and hedge funds. They also allow institutional investors, such as pension funds and municipalities, to obtain a return on excess liquidity.
Their multitrille-dollar size and their role in providing liquidity are indicative of the importance of repo markets. The new guidelines have been surprisingly supported by financial institutions. Figure 3 summarizes the responses received by the FASB following two draft opinions. The first draft of the “Reconsideration of Effective Control for Repurchase Agreements” (November 2010) is expected to change the criteria for effective control. It resulted in comments containing proposals that were then added to the final standard (“FASB Proposes New Accounting Guidelines for Rest”,” KPMG Defining Issues, January 2013, No. 13-6). Of particular note is the massive support he gave to the proposal in 2010. The audit firm`s eight responses can be described as either favourable or qualified in favour of the proposal. Out of a total of 19 responses, 16 can be qualified as a preference or qualified preference for the proposal. However, the second project of “Effective control of transfers with commitment agreements for assets and reprègement accounts” (January 2013) received more mixed support. IFRS 15 provides that if the redemption price is higher than the original sale price, the customer is incentivized, but if the repurchase price is lower than the original sale price, there is no incentive for the customer. Retirement transactions are generally available in three forms: to explain the difference between sales accounting and secured borrowing, we look at the example of Lehman Brothers, which used extensive repo programs before finally declaring bankruptcy in 2008.
Its practices are described in more detail in “How Lehman Brothers and MF Global`s Misuse of Repurchase Agreements Reformed Accounting Standards” on page 44 of this issue. . . .