UPDATE 2-FASB may look at repo accounting after SEC review

Tue Apr 20, 2010 9:56pm EDT

* FASB could consider changes to repo accounting

* Examiner says Lehman used certain repo methods

* FASB will work closely with SEC on any changes

* FASB says Lehman did not comply with disclosure rules (Adds Schapiro, Frank comments, other details)

By Emily Chasan

NEW YORK, April 20 (Reuters) - The Financial Accounting Standards Board, which sets U.S. accounting rules, will consider whether to change repo accounting methods, after U.S. securities regulators finish a review of current practices at U.S. banks and financial firms.

In a letter written to the U.S. House Financial Services Committee and posted on its website on Tuesday, FASB Chairman Robert Herz said the board would "work closely" with the U.S. Securities and Exchange Commission to decide whether any rule changes are necessary after accounting practices employed by Lehman Brothers Holdings Inc LEHMQ.PK known as "Repo 105" and "Repo 108" have come under fire.

According to a report released in March by Lehman's court-appointed examiner, Anton Valukas, Lehman accounted for Repo 105 and Repo 108 transactions as sales, without disclosing that practice to investors and regulators.

The transactions allowed Lehman to temporarily remove some $50 billion in assets from its balance sheet, presenting a stronger financial picture than existed, according to the report.

The SEC in March said it had made inquiries of about two dozen financial firms to determine whether their repo activities over the past few years had been similar to those of Lehman.

"The Examiner's report indicates that Lehman's disclosure was incorrect and misleading," the FASB's Herz wrote in the letter submitted for a hearing on Tuesday.

"According to the Examiner's report, Lehman disclosed that it accounted for all repos as secured borrowings."

SEC Chairman Mary Schapiro told the House Financial Services Committee on Tuesday that the SEC would make the comments it collects from large financial firms public before long. [ID:nWEN3034]

Herz said Lehman's Repo 105 and Repo 108 transactions, as described by the examiner, "were structurally similar to ordinary repo transactions," which are typically accounted for as financings.

Herz said accounting rules for repo transactions, which are largely related to whether a company has maintained control over assets involved in a repo, have been in place since 1997 and have not been "significantly changed" over the years.

"On one hand, having a forward purchase contract -- a right and obligation to buy an asset -- is not the same as owning the asset," Herz wrote. "On the other hand, the contemporaneous transfer and repurchase commitment entered into in a repo transaction raises questions about whether control actually has been relinquished."

Following the hearing on Tuesday Rep. Barney Frank, Chairman of the House Financial Services Committee, said that he was focused on seeing whether FASB's recent changes to an accounting rule known as FAS 140, which controls how companies account for securitizations, special purpose entities and other asset transfers, went far enough to correct the issues seen in the Lehman case.

"There is a debate -- did they (Lehman) follow 140 or not?," Frank said. "It's clear that 140 was not enough."

FASB published changes to the FAS 140 rule last year, under newer rules called FAS 166 and FAS 167.

(Reporting by Emily Chasan; Additional reporting by Kim Dixon; editing by Andre Grenon, Bernard Orr)

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