5.5 Presentation and Disclosure
5.5.1 Presentation
5.5.1.1 Balance Sheet
ASC 860-30
45-1 If the
secured party (transferee) has the right by contract
or custom to sell or repledge the collateral, then
the obligor (transferor) shall reclassify that asset
and report that asset in its statement of financial
position separately (for example, as security
pledged to creditors) from other assets not so
encumbered.
45-2
Liabilities incurred by either the secured party or
obligor in securities borrowing or resale
transactions shall be separately classified.
Pending Content (Transition Guidance: ASC
105-10-65-7)
45-2 Liabilities, including accrued
interest, incurred by either the secured party or
obligor in securities borrowing or resale
transactions shall be separately classified.
Pending Content (Transition Guidance: ASC
105-10-65-7)
45-2A If as of the date of the most
recent statement of financial position the
aggregate carrying amount of reverse repurchase
agreements (securities or other assets purchased
under agreements to resell) exceeds 10 percent of
total assets, the assets shall be separately
classified.
45-3 This
Section does not specify the classification or the
terminology to be used to describe the following:
-
Pledged assets reclassified by the transferor of securities loaned or transferred under a repurchase agreement accounted for as a collateralized borrowing if the transferee is permitted to sell or repledge those securities
-
Liabilities incurred by either the secured party or obligor in securities borrowing or resale transactions.
Example 1 (see paragraph 860-30-55-1) illustrates
possible classifications and terminology.
Pending Content (Transition Guidance: ASC
105-10-65-7)
45-3 This Section does not specify the
classification or the terminology to be used to
describe the following:
- Pledged assets reclassified by the transferor of securities loaned or transferred under a repurchase agreement accounted for as a collateralized borrowing if the transferee is permitted to sell or repledge those securities
- Liabilities, including accrued interest, incurred by either the secured party or obligor in securities borrowing or resale transactions.
Example 1 (see paragraph 860-30-55-1)
illustrates possible classifications and
terminology.
ASC 860-30-45-1 requires entities to reclassify assets pledged as collateral
on the balance sheet (separately from assets not so encumbered) if the
secured party has the right to sell or repledge the asset before a default
by the pledging party. If the secured party does not have the right to sell
or repledge the asset, or can sell or repledge the asset only upon default
by the pledging party, reclassification of the pledged assets on the balance
sheet is not required; however, certain disclosure requirements apply to
pledged assets (see Section 5.5.2).
Transfers that are accounted for as secured borrowings because the transferee
is consolidated by the transferor are also subject to the presentation
requirements in ASC 810-10. For example, entities may be required to
separately present on the balance sheet certain assets and liabilities of a
VIE (see ASC 810-10-45-25).
5.5.1.1.1 Balance Sheet Offsetting
ASC 860-30
Balance Sheet
60-1 For
the conditions that must be met for an entity to
be permitted 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, see paragraphs 210-20-45-11 through
45-12.
ASC 210-20 prescribes the conditions that must be met to offset amounts
related to certain contracts and provides guidance on presentation. An
entity that has recognized receivables from, and payables to, the same
counterparty must meet the conditions in ASC 210-20-45 (or ASC
815-10-45-5 through 45-7 for rights to reclaim cash collateral or
obligations to return cash collateral associated with derivatives) to
offset these amounts.15 ASC 210-20-45 precludes all entities from offsetting receivables
(or payables) with cash or securities.
5.5.1.2 Income Statement
5.5.1.2.1 General
Entities that engage in secured borrowing transactions will incur
interest expense or earn interest income. Unless industry-specific U.S.
GAAP guidance indicates otherwise, interest expense and interest income
should be shown gross in the income statement (i.e., they should not be
netted). In addition, gains and losses on sales of assets should be
reported separately from interest expense and interest income on secured
borrowings.
Connecting the Dots
Some entities use a third-party intermediary to facilitate their
repurchase agreement or securities lending programs. In these
situations, the entity may receive periodic payments that
represent interest and investment income earned (e.g., interest
income earned on reverse repurchase agreements and securities
lending transactions, investment returns on reinvested
collateral, and gains and losses on reinvested collateral) net
of costs incurred (e.g., interest expense paid on repurchase
agreements, interest and fees paid on securities lending
transactions, and expenses paid to the intermediary). In these
situations, entities will need to identify the components of the
net payments received so that they can appropriately present
interest income, interest expense, gains and losses, and
investment fees in the income statement. Amounts may be shown
net in the income statement only when netting of certain income
and expense items is allowed by industry-specific U.S. GAAP.
Example 5-12
Classification of Interest Income and Expense on
Dollar-Roll Arrangements
Dollar-roll repurchase
agreements are arrangements to sell and repurchase
financial assets. They are similar to repurchase
agreements, except that they allow for the
repurchase of financial assets that are considered
substantially the same as, but not necessarily
identical to, the financial assets initially
transferred. Otherwise, the economic returns of
dollar-roll arrangements are viewed as the same as
those for repurchase agreements.
Entity A enters into dollar-roll
repurchase agreements that are accounted for as
secured borrowings. In conjunction with these
transactions, A earns interest income on the
transferred financial assets and incurs interest
expense on the secured borrowing.
Entity A may not net the
interest income earned on the transferred
financial assets with the interest expense
incurred on the secured borrowing. ASC 860-10
requires A to present the financial assets used in
its dollar-roll repurchase agreements accounted
for as secured borrowings separately from the
secured borrowing liability on the balance sheet.
Accordingly, A must recognize interest income on
the transferred financial asset and interest
expense on the secured borrowing separately in its
income statement.
Although ASC 860 does not
specifically state that gross presentation of
interest income and expense is required in a
secured borrowing dollar-roll arrangement, ASC
946-220-45-3(i) indicates that investment
companies should report interest expense
associated with repurchase agreements separately
in the statement of operations. This guidance is
consistent with that on secured borrowing
dollar-roll agreements in the audit and accounting
guides for other industries.
5.5.1.2.2 Broker-Dealers in Securities
ASC 940-320
Income Statement
45-5
Trading gains and losses, which are composed of
both realized and unrealized gains and losses,
shall generally be presented net.
45-6 The
income and expense resulting from complex trading
strategies as described in paragraph 940-320-05-3
may be reflected net in the income statement, with
disclosure of the gross components either on the
face of the income statement or in the notes to
financial statements.
ASC 940-405
45-1
Stock-loan and repurchase transactions may be
entered into for the purpose of financing
positions (such as in lieu of a bank loan). Topic
860 provides general guidance on such
transactions. If such transactions are accounted
for as financing transactions, the rebate or
interest expense shall be reflected in the income
statement as an expense separate and apart from
any trading gains or losses.
Broker-dealers in securities present trading gains and losses net in the
income statement. However, ASC 940-405 indicates that income and
expenses on securities lending and repurchase agreement transactions
that are accounted for as secured borrowings must be presented
separately from trading gains and losses.
5.5.1.3 Statement of Cash Flows
5.5.1.3.1 General
Unless otherwise indicated in industry-specific U.S. GAAP, the transferor
should classify cash received and repaid in a secured borrowing as a
financing activity under ASC 230. The transferee should classify cash
disbursed and repaid in a secured borrowing as an investing activity
under ASC 230. Generally, cash payments should not be presented net of
cash receipts in the statement of cash flows. ASC 230-10-45-9 provides
guidance on presenting gross and net cash flows in the statement of cash
flows and states:
Providing that the original maturity of the asset or liability is
three months or less, cash receipts and payments pertaining to
any of the following qualify for net reporting for the reasons
stated in the preceding paragraph:
- Investments (other than cash equivalents)
- Loans receivable
- Debt.
For purposes of this paragraph, amounts due on demand are
considered to have maturities of three months or less. For
convenience, credit card receivables of financial services
operations — generally, receivables resulting from cardholder
charges that may, at the cardholder’s option, be paid in full
when first billed, usually within one month, without incurring
interest charges and that do not stem from the entity’s sale of
goods or services — also are considered to be loans with
original maturities of three months or less.
When the above conditions are met, entities may choose to present cash
inflows and outflows on a net basis.
5.5.1.3.2 Repurchase Agreements
Because a repurchase agreement represents a collateralized borrowing (for
the cash recipient) and a reverse repurchase agreement represents a
collateralized lending (for the transferee of the security), the related
cash flows should generally be classified as financing and investing
activities, respectively.
On the basis of discussions with the FASB staff, another acceptable
method for determining the appropriate classification of the cash flows
related to repurchase and reverse repurchase agreements is to evaluate
the specific facts and circumstances and the reasons for entering into
each agreement to determine its nature and the entity’s intent. As a
result, both repurchase agreements and reverse repurchase agreements
could be classified in the same section of the statement of cash flows
(i.e., operating, investing, or financing). For example:
-
It is acceptable to classify the cash flows related to repurchase agreements and reverse repurchase agreements as operating activities if the transactions are entered into in connection with the entity’s principal activities (e.g., broker-dealers or other entities with similar operations). Such classification is further supported by a note in Exhibit 6-7 of the AICPA Audit and Accounting Guide Brokers and Dealers in Securities, which states:Depending on the nature of the activity, securities purchased under agreements to resell can be classified as operating or investing; likewise, securities sold under agreements to repurchase can be classified as operating or financing.
-
It is acceptable to classify cash flows related to both repurchase agreements and reverse repurchase agreements as investing cash flows when the primary intent of entering into the transactions is to increase the return on an entity’s investment portfolio. For example, an entity may enter into a repurchase agreement to reinvest the cash proceeds in another investment because the entity believes it can earn a higher return than the spread on the repurchase side of the repurchase agreement. Therefore, even though funds were essentially a secured borrowing in the first leg of the repurchase agreement, the business purpose and substance of the transaction were to generate a higher yield on the investment portfolio and, accordingly, “both legs” could be classified as an investing activity.
-
It is acceptable to classify the cash flows related to both repurchase agreements and reverse repurchase agreements as financing activities if the primary purpose of the arrangement is to provide funds to finance operations or raise working capital.
5.5.1.3.3 Securities Lending Transactions
Because a securities lending transaction represents a collateralized
borrowing (for the cash recipient) and a collateralized lending (for the
cash payor), the related cash flows should generally be classified as
financing and investing activities, respectively. Unless the conditions
in ASC 230-10-45-9 are met, those cash inflows and cash outflows must be
shown on a gross basis on the statement of cash flows. Certain entities,
such as broker-dealers, consider securities lending transactions as
trading activities. As a result, those entities recognize cash inflows
and outflows on transactions involving lending and borrowing securities
as cash flows from operating activities. See Section 5.5.1.3.2 for more information about the
classification of cash flows on repurchase agreements.
5.5.2 Disclosure
ASC 860-30
50-1A An
entity shall disclose all of the following for
collateral:
-
If the entity has entered into repurchase agreements or securities lending transactions, it shall disclose its policy for requiring collateral or other security.
-
As of the date of the latest statement of financial position presented, both of the following:
-
The carrying amount and classifications of both of the following:
-
Any assets pledged as collateral that are not reclassified and separately reported in the statement of financial position in accordance with paragraph 860-30-25-5(a)
-
Associated liabilities.
-
-
Qualitative information about the relationship(s) between those assets and associated liabilities; for example, if assets are restricted solely to satisfy a specific obligation, a description of the nature of restrictions placed on those assets.
-
-
If the entity has accepted collateral that it is permitted by contract or custom to sell or repledge, it shall disclose all of the following:
-
The fair value as of the date of each statement of financial position presented of that collateral
-
The fair value as of the date of each statement of financial position presented of the portion of that collateral that it has sold or repledged
-
Information about the sources and uses of that collateral.
-
For overall guidance on Topic 860’s disclosures, see
Section 860-10-50.
Disclosures for Repurchase Agreements, Securities
Lending Transactions, and Repurchase-to-Maturity
Transactions
50-7 To
provide an understanding of the nature and risks of
short-term collateralized financing obtained through
repurchase agreements, securities lending transactions,
and repurchase-to-maturity transactions, that are
accounted for as secured borrowings at the reporting
date, an 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:
-
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.
-
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).
-
-
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.
-
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.
Pending Content (Transition Guidance: ASC
105-10-65-7)
50-7 To provide an understanding of the
nature and risks of short-term collateralized
financing obtained through repurchase agreements,
securities lending transactions, and
repurchase-to-maturity transactions, that are
accounted for as secured borrowings at the
reporting date, an 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:
- 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.
- 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).
- 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.
- 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.
- For a public business entity, the weighted-average interest rate of the repurchase liability and the related repurchase liability.
50-8 A
reporting entity also shall disclose the information
required by paragraphs 210-20-50-1 through 50-6 for both
of the following that are either offset in accordance
with Section 210-20-45 or subject to an enforceable
master netting arrangement or similar agreement:
-
Recognized repurchase agreements accounted for as a collateralized borrowing and reverse repurchase agreements accounted for as a collateralized borrowing
-
Recognized securities borrowing and securities lending transactions.
ASC 860-30 — SEC Materials
Assets Subject to Lien
S50-1 See
paragraph 235-10-S99-1, Regulation S-X Rule 4-08(b), for
required disclosures for assets subject to lien.
ASC 860-30-50 addresses disclosure requirements that apply to secured borrowings.
Transfers of financial assets to consolidated entities are subject to these
disclosure requirements since the guidance in ASC 860-30 on secured borrowing
accounting applies. An entity must also provide the disclosures required by ASC
810-10-50.
ASC 860-30-55-4 illustrates an approach that satisfies the requirement in ASC
860-30-50-7.
ASC 860-30
Example 2: Disclosures for Repurchase Agreements,
Securities Lending Transactions, and
Repurchase-to-Maturity Transactions Accounted for
as Secured Borrowings
55-4 This
Example illustrates one approach for satisfying the
quantitative disclosure requirements in paragraph
860-30-50-7.
Pending Content (Transition Guidance: ASC
105-10-65-7)
55-4 This Example illustrates one
approach for satisfying the quantitative
disclosure requirements in paragraph
860-30-50-7(a) through (b).
Footnotes
15
Note that ASC 210-20-45-11 through 45-17 provide specific
guidance on repurchase and reverse repurchase agreements.