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Should repurchase transactions be accounted for as sales or loans?

Research output: Contribution to journalJournal article

Published

Journal publication date1/12/2012
JournalAccounting Horizons
Journal number4
Volume26
Number of pages23
Pages657-679
Original languageEnglish

Abstract

In this paper, we discuss the accounting for repurchase transactions, drawing on how repurchase agreements are characterized under U.S. bankruptcy law, and in light of the recent developments in the U.S. repo market. We conclude that the current accounting rules, which require the recording of most such transactions as collateralized loans, can give rise to opaqueness in a firm's financial statements because they incorrectly characterize the economic substance of repurchase agreements. Accounting for repurchase transactions as sales and the concurrent recognition of a forward, as “Repo 105” transactions were accounted for by Lehman Brothers, has furthermore overlooked merits. In particular, such a method provides a more comprehensive and transparent picture of the economic substance of such transactions.