Amended repurchase guidance affects asset managers

Transcription

1 Amended repurchase guidance affects asset managers For registered investment advisers (RIAs), additional disclosure will need to be added to the notes of the financials for entities with repurchase-to-maturity transactions. This is due to FASB s efforts to increase transparency via Accounting Standards Update No , Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures (the ASU). The ASU amended Accounting Standards Codification Topic 860, Transfers and Servicing (ASC 860), which provides guidance on accounting for certain repurchase agreements (repos). ASU : Requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements) Eliminates accounting guidance on linked repurchase financing transactions Expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales Expands disclosure requirements related to certain transfers accounted for as secured borrowings (specifically, repos, securities lending transactions and repurchase-to-maturity transactions) Although this guidance was issued in 2014, we are beginning to see the first financial statements affected by the amendments Staggered effective dates The ASU designates staggered effective dates for accounting and disclosure requirements. These depend on whether the reporting entity is a public or a nonpublic business entity, as shown below. Public entities Accounting changes are effective for the first interim or annual period beginning after Dec. 15, Early adoption is not permitted. Apply the new accounting guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Apply the disclosure requirements related to certain transactions accounted for as a sale to interim and annual periods beginning after Dec. 15, Apply the disclosure requirements related to repurchase agreements, securities lending transactions and repurchase-to-maturity transactions accounted for as secured borrowing to annual periods beginning after Dec. 15, 2014, and to interim periods beginning after March 15, Nonpublic entities Accounting guidance is effective for annual periods beginning after Dec. 15, 2014, and interim periods beginning after Dec. 15, May elect to early adopt the accounting guidance for interim periods beginning after Dec. 15, Apply the new accounting guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Disclosure requirements are effective for annual periods beginning after Dec. 15, 2014, and interim periods beginning after Dec. 15, Entities are not required to present comparative disclosures before the effective date.

2 ASC 860 derecognition criteria Repurchase agreements and securities lending transactions are required to be evaluated under each of the following conditions for derecognition: Isolation. The transferred financial assets must be placed beyond the reach of the power of a bankruptcy trustee or other receiver for the transfer or of any consolidated affiliates, except for certain bankruptcy-remote entities, included in the financial statements being presented. Transferee s rights to pledge or exchange. An assessment of the transferee s rights to pledge or exchange the transferred financial assets is required. If a transferor has transferred financial assets to an independent third-party custodian or a transferee under conditions that preclude the transferee from selling or repledging the assets during the term of the repurchase agreement, the transferor has not surrendered control over those assets. In a securities lending transaction to the extent that the collateral consists of letters of credit or other financial instruments that the holder is not permitted by contract or custom to sell or repledge the transaction does not satisfy the sale conditions and is accounted for as a loan of securities by the transferor to the transferee. Effective control. An assessment of whether the transferor maintains effective control over transferred financial assets is required. An agreement that both entitles and obligates the transferor to repurchase transferred financial assets from the transferee maintains the transferor s effective control over transferred financial assets. Therefore, transfers with agreements to repurchase transferred financial assets that either meet the effective control criteria or qualify for the repurchase-to-maturity transaction exception need not be assessed under the remaining conditions for derecognition and should be accounted for as a secured borrowing. Repurchase agreements and securities lending transactions that do not meet all the conditions in paragraph should be treated as secured borrowings. Repurchase-to-maturity transactions accounted for as secured borrowings The ASU states that repos and securities lending transactions should be accounted for as secured borrowings if they do not meet ASC 860 s derecognition criteria. Both public and nonpublic businesses should apply the guidance by using a cumulative-effect approach to account for transactions that are outstanding at the beginning of the adoption period. The ASU also prohibits entities from accounting for repurchase-to-maturity transactions as sales. A repurchase-to-maturity transaction is a repo that settles at the maturity of the transferred financial asset and does not require the transferor to reacquire the transferred financial asset. These transactions should be accounted for as a secured borrowing as if the transferor maintains effective control (they were previously considered to have surrendered control since the transferred financial asset was never reacquired). 2

3 Amended repurchase guidance affects asset managers Linked repurchase financing transactions Certain transfers accounted for as sales The ASU eliminates ASC 860 s previous guidance on repurchase financing transactions and requires the transferor and transferee to simultaneously account for the initial transfer of the financial asset as a purchase and sale (assuming derecognition conditions are met). In addition, the ASU requires entities to evaluate and account for the repurchase component of the combined transaction in the same way they would evaluate and account for other typical repurchase agreements. This may reduce some of the cost and complexity of these transactions, since more repurchase financing transactions will be accounted for as secured borrowings due to the elimination of the requirement to evaluate a presumption of linkage. The ASU requires additional disclosures regarding transactions accounted for as sales that are a transfer of financial assets to a transferee or are an agreement in advance of an initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. Maintaining effective control Under the amended guidance, an entity that determines it does not maintain effective control over the transferred financial asset still needs to meet the remaining derecognition criteria (i.e., legal isolation and the right to pledge or exchange) to qualify for sale accounting. The ASU also states that agreements to repurchase financial assets should be accounted for as secured borrowings, as long as they meet either the effective-control criteria or repurchase-to-maturity exception. Disclosure requirements The ASU defines new disclosure requirements for certain transfers of financial assets accounted for as sales and collateral supporting repos, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings. 3 The ASU clarifies that this disclosure requirement applies to the following types of transactions: Transfers of financial assets with an agreement to repurchase the transferred financial asset (or substantially the same financial asset) before maturity at a fixed or determinable price that will be settled in a form other than the return of the transferred financial asset (for example, the transaction is cash-settled). Transfers of financial assets with an agreement that requires that the transferor retain substantially all of the exposure to the economic return on the transferred financial asset (for example, a sale with a total return swap).

4 The ASU excludes dollar-roll transactions that qualify for sale accounting and transactions that are subject to other disclosure requirements (i.e., securitizations, asset-backed financing arrangements and similar transfers that meet certain criteria). For outstanding transactions as of the reporting date that fall within the scope of this disclosure requirement, the amended guidance requires an entity to disclose the following: The carrying amount of assets derecognized as of the date of derecognition. If the derecognized amounts have changed significantly from those derecognized in prior periods or are not representative of the activity throughout the period, the entity must include a discussion of the reasons for the change. The amount of gross cash proceeds received by the transferor for the assets derecognized as of the date of derecognition. Information about the transferor s ongoing exposure to the economic return on the transferred financial assets, disclosed by type of transaction (e.g., repo, securities lending arrangement, or sale and total return swap). The information should include: The fair value of assets derecognized by the transferor as of the reporting date The amounts reported in the statement of financial position arising from the transaction (e.g., the carrying value or fair value of forward repurchase agreements or swap contracts) A description of the arrangements that result in the transferor retaining substantially all of the exposure to the economic return on the transferred financial assets and risks related to those arrangements Required disclosures about certain transfers accounted for as sales Included in the ASU, this example shows how an entity would present information about transfers of financial assets accounted for as sales (i.e., transactions involving repos, a sale with a total return swap or securities lending). At the date of derecognition for transactions outstanding (Dollars in millions) At the reporting date (Dollars in millions) Type of transaction Carrying amount derecognized Gross cash proceeds received for assets derecognized Fair value of transferred assets Gross derivative assets recorded (a) (b) Gross derivative liabilities recorded (a) (b) Repurchase agreements $XX $XX $XX $XX $XX Sale and a total return swap $XX $XX $XX $XX $XX Securities lending $XX $XX $XX $XX $XX Total $ XX $ XX $ XX $ XX $ XX (a) Balances are presented on a gross basis before the application of counterparty and cash collateral offsetting. (b) Gross derivative assets of $XX and gross derivative liabilities of $XX are included as interest rate contracts in footnote X on derivative disclosures. Gross of $XX and gross derivative liabilities of $XX are included as credit risk contracts in footnote X on derivative disclosures and derivative assets. 4

5 Certain transfers accounted for as secured borrowings To enhance the transparency of collateral supporting repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings, the new guidance requires entities to disclose: A disaggregation of the gross obligation by the class of collateral pledged. The appropriate level of disaggregation and classes should be presented based on the nature, characteristics and risks of the collateral pledged. The remaining contractual maturity of the repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. A discussion of potential risks associated with the agreements and pledged collateral (i.e., obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed). Required disclosures about certain transfers accounted for as secured borrowings This example is included in the ASU and shows how an entity would present information about collateral supporting repos, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings. 20XX Remaining contractual maturity of the agreements Overnight and continuous Up to 30 days 30 to 90 days >90 days Total Repurchase agreements and repurchase-to-maturity transactions $XXX $XXX $XXX $XXX $XXX U.S. Treasury and agency securities $XXX $XXX $XXX $XXX $XXX State and municipal securities $XXX $XXX $XXX $XXX $XXX Asset-backed securities $XXX $XXX $XXX $XXX $XXX Corporate securities $XXX $XXX $XXX $XXX $XXX Equity securities $XXX $XXX $XXX $XXX $XXX Non-U.S. sovereign debt $XXX $XXX $XXX $XXX $XXX Loans $XXX $XXX $XXX $XXX $XXX Other $XXX $XXX $XXX $XXX $XXX Total $XXX $XXX $XXX $XXX $XXX Securities lending transactions $XXX $XXX $XXX $XXX $XXX U.S. Treasury and agency securities $XXX $XXX $XXX $XXX $XXX State and municipal securities $XXX $XXX $XXX $XXX $XXX Corporate securities $XXX $XXX $XXX $XXX $XXX Equity securities $XXX $XXX $XXX $XXX $XXX Non-U.S. sovereign debt $XXX $XXX $XXX $XXX $XXX Loans $XXX $XXX $XXX $XXX $XXX Other $XXX $XXX $XXX $XXX $XXX Total $XXX $XXX $XXX $XXX $XXX Total borrowings $XXX $XXX $XXX $XXX $XXX Gross amount of recognized liabilities for repurchase agreements and securities lending in footnote Amounts related to agreements not included in offsetting disclosure in footnote $XXX $XXX 5

6 Conclusion Although this amended guidance was passed in 2014, RIAs are now beginning to prepare financial statements under the new structure. If you have questions regarding your own statements, please contact Grant Thornton LLP. Contacts Michael Patanella Audit Partner U.S. Asset Manager Sector Leader T E michael.patanella@us.gt.com Joseph Magri Senior Manager Financial Services Audit T E joseph.magri@us.gt.com This content is not intended to answer specific questions or suggest suitability of action in a particular case. For additional information about the issues discussed, contact a Grant Thornton LLP professional. Connect with us linkd.in/grantthorntonus Grant Thornton refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL), and/or refers to the brand under which the GTIL member firms provide audit, tax and advisory services to their clients, as the context requires. GTIL and each of its member firms are separate legal entities and are not a worldwide partnership. GTIL does not provide services to clients. Services are delivered by the member firms in their respective countries. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions. In the United States, visit grantthornton.com for details Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd