TY - JOUR

T1 - Should repurchase transactions be accounted for as sales or loans?

AU - Chircop, Justin

AU - Kiosse, Paraskevi Vicky

AU - Peasnell, Ken

PY - 2012/12/1

Y1 - 2012/12/1

N2 - 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.

AB - 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.

U2 - 10.2308/acch-50176

DO - 10.2308/acch-50176

M3 - Journal article

VL - 26

SP - 657

EP - 679

JO - Accounting Horizons

JF - Accounting Horizons

SN - 0888-7993

IS - 4

ER -