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A borrower may grant a security interest in financial assets to a lender (the secured party) that serves as collateral for the borrower’s obligation(s). Under these arrangements, the debtor frequently is required to transfer the collateral to the lender or to a custodian. This section assumes that this transfer of collateral would not result in derecognition of the collateral under ASC 860-30-40. ASC 860-30 and Regulation S-X prescribe certain presentation and disclosure requirements for reporting entities involved in these transactions.

22.6.1 Balance sheet presentation - general considerations

If a secured party (transferee of collateral) has the right by contract or custom to sell or repledge collateral received, ASC 860-30-45-1 requires the transferor of the collateral to report the asset on its balance sheet separately from other assets not encumbered or pledged (e.g., as “securities pledged to creditors”). However, ASC 860-30-45-3 clarifies that a transferor has discretion regarding the classification and terminology used to comply with this requirement.
Similarly, ASC 860-30-45-2 directs that liabilities incurred by either the secured party or the obligor arising from securities lending transactions or repurchase agreements (also referred to as “repos”) be separately classified on its balance sheet. However, once again, ASC 860 does not prescribe how a reporting entity should characterize these liabilities. In practice, we have seen the following descriptions used:
  • “Securities loaned or sold under repurchase agreements” or “Securities loaned or sold under agreements to repurchase”
  • “Repurchase agreements”
  • “Securities sold under agreements to repurchase” or “Securities sold under repurchase agreements”
Similarly, we have seen reporting entities use the following terms to describe receivables relating to resale agreements (also referred to as “reverse repurchase agreements” or “reverse repos”) and securities borrowing transactions:
  • “Securities borrowed or purchased under resale agreements” or “Securities borrowed or purchased under agreements to resell”
  • “Resale agreements” or “Securities borrowed"
  • “Securities purchased under agreements to resell” or “Securities purchased under resale agreements”
Reporting entities that prepare their financial statements in accordance with Regulation S-X should also consider these presentation requirements (see FSP 22.6.5):
  • Under S-X 4-08(m), if the aggregate carrying amount (or market value, if higher) of securities or other assets sold under repurchase agreements exceeds 10% of total assets, a registrant is required to present the aggregate related liability separately on the balance sheet. Similarly, if the aggregate carrying amount of reverse repurchase agreements exceeds 10% of total assets, a registrant is required to present the aggregate related receivable separately on the balance sheet.
  • Banks subject to the reporting requirements in S-X 9-03 frequently combine amounts owed by them (due to them) under repurchase agreements or securities lending agreements with the liability (receivable) arising from borrowing (selling) federal funds, and report the aggregate liability (receivable) amount as a single line item on the balance sheet. S-X 9-03 prohibits any net presentation of these obligations and receivables.

22.6.2 Balance sheet presentation - offsetting considerations

A reporting entity may offset (present net) receivables and payables if a right of setoff exists, as defined in ASC 210-20-45-1. Contractual terms and settlement conventions prevalent in the securities lending markets usually preclude these transactions from meeting the four conditions cited in that paragraph. Thus, receivables and payables stemming from securities lending and borrowing activities are often reported gross on the balance sheet.
Notwithstanding the criterion in ASC 210-20-45-1(c) regarding intention to setoff, payables and receivables arising from repurchase and reverse repurchase agreements may also qualify for balance sheet offset if the contractual terms and related settlement arrangements meet the six criteria cited in ASC 210-20-45-11. These conditions are specific to repos/reverse repos, and are not applicable by analogy to other transactions. Further, the reporting entity’s choice to offset (or not) is to be applied consistently.

Excerpt from ASC 210-20-45-11

…[A]n entity may, but is not required to, offset amounts recognized as payables under repurchase agreements accounted for as collateralized borrowings and amounts recognized as receivables under reverse repurchase agreements accounted for as collateralized borrowings if all of the following conditions are met:
  1. The repurchase and reverse repurchase agreements are executed with the same counterparty.
  2. The repurchase and reverse repurchase agreements have the same explicit settlement date specified at the inception of the agreement.
  3. The repurchase and reverse repurchase agreements are executed in accordance with a master netting arrangement.
  4. The securities underlying the repurchase and reverse repurchase agreement exist in book entry form and can be transferred only by means of entries in the records of the transfer system operator or securities custodian…
  5. The repurchase and reverse repurchase agreements will be settled on a securities transfer system…, and the entity must have associated banking arrangements in place...
  6. The entity intends to use the same account at the clearing bank or other financial institution at the settlement date in transacting both the cash inflows resulting from the settlement of the reverse repurchase agreement and the cash outflows in settlement of the offsetting repurchase agreement.

A reporting entity may not offset payables and receivables arising from repurchase and reverse repurchase agreements based solely on the existence of a master netting arrangement with the counterparty.

22.6.3 Disclosure of offsetting and master netting

A reporting entity that offsets amounts attributable to (1) repurchase and reverse repurchase agreements and/or (2) securities borrowing and lending transactions is subject to the disclosure requirements in ASC 210-20-50. The disclosures in ASC 210-20-50 also extend to reverse repurchase and repurchase agreements, and to securities borrowing and lending transactions, subject to enforceable master netting arrangements regardless of whether the related receivables and payables are offset in the reporting entity’s balance sheet.
See FSP 19.5.7 for information about the disclosures required by ASC 210-20-50.

22.6.4 Collateralized financing transactions: obligors’ disclosures

For repurchase agreements, repurchase-to-maturity transactions, and securities lending agreements reported as secured borrowings, ASC 860-30-50-7 directs obligors (i.e., reporting entities that have transferred financial assets (collateral)) to provide the following information for each interim and annual period:

Excerpt from ASC 860-30-50-7

[A]n entity shall disclose the following information for each interim and annual period about the collateral pledged and the associated risks to which the transferor continues to be exposed after the transfer:
  1. A disaggregation of the gross obligation by the class of collateral pledged. An entity shall determine the appropriate level of disaggregation and classes to be presented on the basis of the nature, characteristics, and risks of the collateral pledged.
    1. Total borrowings under those agreements shall be reconciled to the amount of the gross liability for repurchase agreements and securities lending transactions disclosed in accordance with paragraph 210-20-50-3(a) before any adjustments for offsetting. Any difference between the amount of the gross obligation disclosed under this paragraph and the amount disclosed in accordance with paragraph 210-20-50-3(a) shall be presented as reconciling item(s).
  2. The remaining contractual maturity of the repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions. An entity shall use judgment to determine an appropriate range of maturity intervals that would convey an understanding of the overall maturity profile of the entity’s financing agreements.
  3. A discussion of the potential risks associated with the agreements and related collateral pledged, including obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed.

ASC 860-30-55-4 illustrates one approach for meeting the quantitative disclosure requirements of ASC 860-30-50-7.

22.6.5 Regulation S-X disclosures for repos and reverse repos

If the aggregate carrying amount (or market value, if higher) of securities or other assets sold under repurchase agreements exceeds 10% of total assets, S-X 4-08(m) requires a registrant to disclose in the footnotes:
  • The carrying value and market value of the assets sold (exclusive of trading assets or assets obtained under reverse repurchase agreements), segregated by security type and grouped by ranges of the agreements’ maturity dates, along with the associated liability and related interest rate(s), presented in a tabular format
  • If the amount at risk under these agreements (as defined in the rule) with any single counterparty (or group of related counterparties) exceeds 10% of stockholders’ equity, the counterparty’s (or group’s) name, the amount at risk with each, and the weighted average maturity of the underlying agreements
If the aggregate carrying amount of reverse repurchase agreements exceeds 10% of total assets, a registrant is required to provide the following disclosures:
  • The registrant’s policy with regard to taking possession of the securities or assets under the agreements
  • Provisions to ensure that the market value of the underlying assets remains sufficient to protect the registrant in the event of counterparty default and disclosures about the nature of those provisions
  • If the amount at risk under these agreements (as defined in the rule) with any single counterparty (or group of related counterparties) exceeds 10% of stockholders’ equity (or net asset value, if an investment company), the counterparty’s (or group’s) name(s), the amount at risk, and the weighted average maturity of the underlying agreements

22.6.6 Collateral-related disclosures

ASC 860-30-50-1A requires the following disclosures about collateral:
  • The reporting entity’s policy for requiring collateral or other security in repurchase agreements and securities lending transactions
  • As of the latest balance sheet date presented, the carrying amount and classification of assets pledged as collateral that are not reclassified and separately reported on the balance sheet, and associated liabilities
  • As of the latest balance sheet date presented, qualitative information about the relationship between the pledged assets and associated liabilities (e.g., restrictions on the use of the collateral pledged to secure certain obligations)
  • With respect to collateral the reporting entity is permitted to sell or repledge:
    • The fair value of the collateral and the fair value of any portion sold or repledged for each balance sheet presented
    • Information about the sources and uses of the collateral
S-X 4-08(b) also requires registrants to provide information about assets mortgaged, pledged, or otherwise subject to lien, and identify the obligations collateralized for the most recent balance sheet filed. This information may appear on the face of the balance sheet or in the footnotes.
Figure FSP 22-5 illustrates a sample disclosure of accounting and reporting policies relating to repurchase (resale) agreements and securities lending (borrowing) transactions, accompanied by a discussion of its policies regarding related collateral. For simplicity, this sample disclosure omits any required comparative amounts.
Figure FSP 22-5
Sample disclosure—summary of significant accounting policies: repurchase and securities lending transactions and related collateral arrangements
This sample disclosure illustrates the application of certain of the requirements in ASC 860-30-50-1A.
Note X—Summary of Significant Accounting Policies
Securities Financing Arrangements
Securities purchased under agreements to resell and securities sold under agreements to repurchase are reported as financing transactions, and thus the related receivables and payables are presented in the accompanying balance sheets at the amounts at which the securities subsequently will be resold or reacquired as specified in the respective agreements. Such amounts include accrued interest. Receivables and payables arising from these agreements are offset in the balance sheet when permitted under applicable accounting standards. It is the Company’s policy to take possession of securities purchased under agreements to resell. On a daily basis, the Company monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral as necessary. The Company’s agreements with third parties specify their rights to request additional collateral. All collateral is held by the Company or a custodian.
Securities borrowed and securities loaned transactions also are reported as financing transactions, and thus the related receivable and payables are carried at the amounts of cash advanced and received, respectively, plus accrued interest. The Company measures the fair value of the securities borrowed and loaned against the cash collateral on a daily basis. Additional cash collateral is obtained as necessary to ensure such transactions are adequately collateralized. The Company’s agreements with third parties specify their rights to request additional collateral. All collateral is held by the Company or a custodian. It is the Company’s policy to accept only cash collateral in connection with these transactions.
For certain resale agreements and securities-borrowed transactions, securities received qualify for recognition on the balance sheet, in which case they are recorded at fair value, along with a corresponding obligation to return them. Cash collateral received in connection with repurchase agreements and securities-lending arrangements is recorded on the Company’s balance sheet, along with the related obligation to reacquire the securities. Securities sold under repurchase agreements and securities loaned that the transferee-borrower may sell or repledge are reclassified and reported separately on the accompanying balance sheet.
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