FASB Moves The Bar On Repo Accounting Due To Lehman Brothers Scheme

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NORWALK, Conn. – The Financial Accounting Standards Board issued new rules last week to update how companies account for repurchase agreements like the kind Lehman Brothers used to temporarily move billion of dollars of assets temporarily off its books and hide how much debt it had just before reporting its quarterly results.

The new rules are aimed at improving the accounting for repos by removing from the assessment of effective control the requirement that the transferor have the ability to repurchase or redeem the financial assets, as well as implementation guidance related to that criterion. “The new guidance improves transparency by eliminating consideration of the transferor’s ability to fulfill its contractual rights and obligations from the criteria in determining effective control,” said Leslie Siedman, chairman of the FASB.

In a typical repo transaction, an entity transfers financial assets to a counter-party in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. The FASB rules set out when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets.

Lehman Brothers’ use of so-called “Repo 105” repurchase transactions was cited as one of the causes behind the collapse of the investment bank in 2008. Lehman had accounted for its repos as sales instead of borrowings and used the proceeds to reduce its debt, lowering its apparent leverage by as much as $50 billion, according to a report last year by the bankruptcy examiner.

Lehman had claimed to have relinquished control because it received only $100 for each $105 in collateral it posted, meaning it did not get adequate cash to repurchase the assets, according to the bankruptcy examiner's report. The transactions were dubbed Repo 105 for the amount of collateral involved.

The new rule, proposed last November, takes effect on Dec. 15.


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