Journal Entry For Repurchase Agreement
Finally, ASU 2014-11 is also extending advertising obligations for the advertising of financial assets recorded as sales, as well as certain transfers recorded as guaranteed bonds (Abhinetri Velanand, Shahid Shah and Adrian Mills, “FASB makes limited changes to its Guidance Board accountant,” Deloitte Heads Up, June 19, 2014). In the case of transactions or pension agreements marked as sales, information should be provided on the amounts of accounting, the amounts received for the guarantees, the outstanding commitments of the agreement and an explanation of the corresponding amounts recorded on the balance sheet. In addition, bonds issued for all transactions and pension agreements in the form of secured bonds must include disclosure of security, remaining commitments and a risk assessment. An accounting position is indicated in the form of a secured credit and not a “sale” transaction. The accounting for these pension transactions is explained in the following sections. Financing agreements also become an accounting treatment as forwards and call options. The accounting treatment of sales with return rights goes beyond the scope of this article, but it is dealt with in detail in the return and acceptance rights of customers. The following diagram provides a complete overview of the accounting process for pension transactions. Some contracts include a pension contract that allows an entity to buy back the asset for sale. Accounting treatment depends on the nature of the pension contract and the contractual terms. Pension transactions that are considered financial instruments are not within the scope of this article. The rest of this article explains how pension transactions can be taken into account and changes are described in the codification of Accounting Standards (CSA) 605 to CSA 606.
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.
A repurchase agreement usually involves the transfer of securities for cash. The amount of money transferred depends on the market value of the securities, net of a declared percentage intended to be used as a cushion. This cushion, called “haircut,” protects the purchaser if the securities need to be liquidated to be repaid. In addition, the ceding company agrees to buy back the securities at a higher price at a later date. The repurchase price is generally higher than the initial price paid by the purchaser, the difference being interest. Since the seller is contractually obliged to repurchase the securities at an agreed price, he retains much of the risk of ownership. To explain the difference between the sales bill and the secure loan, look at the example of Lehman Brothers, which used major repo programs before finally going bankrupt in 2008.