Accounting Of Repurchase Agreement

Pension transactions are available in three different forms: cash paid on the initial sale of securities and money paid at the time of redemption depend on the value and type of security associated with the pension. In the case of a loan. B, both values must take into account the own price and the value of the interest accrued on the loan. On the other hand, we can analyze that the customer is not incentivized to exercise the buyback option, so it is very likely that the option will not be exercised, in which case the transaction must be recognized as the sale of a product with the right of return. 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. His 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. In short, Lehman`s goal in using repo operations was to reduce the overall size of its balance sheet and reduce its leverage ratio, both of vital importance to maintaining a good credit rating. Guaranteed credit accounting does not achieve this objective and would result in unchanged leverage ratios. As a result, Lehman held a sales accounting with a buyout agreement. In this treatment, there is no recognition of a contractual obligation to repurchase in the balance sheet. The securities are debited at the time of return, the call option is removed and the cash returned to the lender includes an interest payment. Exhibits 1 and 2 illustrate this approach. In total, Repos Lehman helped remove up to $50 billion of debt from the balance sheet, which had little or no impact on other financial statements.

As a general rule, a pension contract is a contract by which an entity sells and promises an asset or has the possibility (either in the same contract or in another contract) to buy back the asset. The obligation for a company to repurchase the asset (a futures contract – see 3.7.2); On the basis of IFRS 15, the repurchase transaction should be treated as a financing agreement that does not generate revenue. And in the third contract, we have that the repurchase price is 2,900,000 and a fair value of 4,000,000, unlike previous contracts where the company had the possibility or obligation to buy back the asset, in this third contract, the entity is obliged to repurchase the assets at the request of the customer.

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