April 29, 2011 / 9:38 PM / 8 years ago

FASB changes repo accounting rule used by Lehman

* Rule closes Lehman’s Repo 105 loophole — expert

* Rule change first proposed last November

By Dena Aubin

NEW YORK, April 29 (Reuters) - U.S. rule makers updated an accounting rule on repurchase agreements to close an accounting loophole that Lehman Brothers Holdings Inc LEHMQ.PK used to hide how indebted it was.

The Financial Accounting Standards Board said on Friday it changed the rule to address questions that came up during the global financial crisis about how to account for repos, essentially a type of short-term borrowing.

In a repo agreement, a company raises cash by turning over assets as collateral, with an agreement to buy the assets back.

Lehman had accounted for its repos as sales instead of borrowings and used the proceeds to reduce its debt, lowering its apparent leverage by as much as $50 billion, according to a report last year by bankruptcy examiner Anton Valukas.

With its so-called Repo 105 transactions, Lehman in effect borrowed tens of billions of dollars, but did not disclose the obligation to repay the debt and kept it off its balance sheet, Valukas said.

“What FASB has done is close a loophole — specifically the loophole that Lehman appears to have wiggled through in accounting for the Repo 105 transactions the way it did,” said Bruce Pounder, an executive at SmartPros Ltd, which provides education to accounting professionals.

Under the previous accounting rules, whether a repo was reported as a sale or financing depended in part on whether a company kept effective control over the transferred assets. Effective control in turn depended on the company’s ability to buy the assets back.

FASB’s new rule will remove the ability to repurchase the assets as a criteria.

“I think it will certainly make it vastly harder for any reporting entity to do what Lehman did in accounting for the Repo 105 transactions and claim they did it correctly under U.S. GAAP,” Pounder said, referring to generally accepted accounting procedures.

Lehman had claimed to have relinquished control because it received only $100 for each $105 in collateral it posted, meaning it did not get adequate cash to repurchase the assets, according to the bankruptcy examiner’s report. The transactions were dubbed Repo 105 for the amount of collateral involved.

The new rule, proposed last November, takes effect on Dec. 15, FASB said. (Reporting by Dena Aubin; editing by Andre Grenon)

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