Mr. Robinhood. "What are the near and far legs in a buyout contract?" Access on August 14, 2020. 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. Michael has been a regular at XYZ Financial for many years. During one of his bank visits, the cashier informs him that he could earn a higher interest rate if he converts his savings account into a pension contract. Under these conditions, Michael acquired a stake in an asset pool that the bank would buy back within 90 days for a premium. The narrator explains to Michael that the assets in question are high-quality U.S. sovereign debt. Beginning in late 2008, the Fed and other regulators adopted new rules to address these and other concerns.
One consequence of these rules was to increase pressure on banks to maintain their safest assets, such as Treasuries. They are encouraged not to borrow them through boarding agreements. According to Bloomberg, the impact of the regulation was significant: at the end of 2008, the estimated value of the world securities borrowed was nearly $4 trillion. But since then, that number has been close to $2 trillion. In addition, the Fed has increasingly entered into repurchase (or self-reversion) agreements to compensate for temporary fluctuations in bank reserves. To explain the difference between the sales bill and the secure loan, consider the example of Lehman Brothers, which used major repo programs before declaring bankruptcy 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. To determine the actual costs and benefits of a pension transaction, the buyer or seller wishing to participate in the transaction must take into account three different calculations: in June 2014, the FASB Accounting Standards Update (ASU) 2014-11, Transfers and Servicing (Topic 860): buyback, repurchase and disclosure maturity transactions.