Repurchase and reverse repurchase agreements: derecognition and collateral accounting

A repo looks like a sale on its face (the security legally changes hands and cash is received) but IFRS 9 looks past the legal form to the retained risks and rewards: because the fixed repurchase price means the transferor still bears the security's price risk, deconsolidating the security and recording a sale would understate the transferor's true asset base and disguise what is, in substance, a secured borrowing, this substance-over-form call is central to how a bank's true leverage and asset encumbrance are reported.

Does the repurchase price mechanism (a fixed price or a lending-rate-like return) indicate the transferor has retained substantially all risks and rewards, precluding derecognition of the transferred security? Is the transferor continuing to recognize the security in full and recording the cash received as a repo liability, rather than derecognizing the security as a sale? If the reverse repo counterparty repledges or sells the collateral received, has it recognized an obligation to return equivalent securities? Has offsetting of repo and reverse repo balances been tested against the strict IAS 32 criteria rather than assumed from the existence of a master agreement?

1. Analyze the repurchase price mechanism first: a fixed repurchase price (or the original price plus a lending-rate-like return) indicates the transferor has retained substantially all risks and rewards, precluding derecognition; a repurchase at the security's fair value on the repurchase date points toward a genuine sale with a separate forward or option arrangement.
2. If risks and rewards are substantially retained, continue to recognize the transferred security on the transferor's balance sheet in full, and recognize the cash received as a financial liability (repo payable) rather than derecognizing the security.
3. On the reverse repo side, the counterparty recognizes a loan and receivable (reverse repo asset) rather than purchasing the underlying security, it does not recognize the security received as collateral on its own balance sheet.
4. If the reverse repo counterparty subsequently sells or repledges the collateral security, it recognizes an obligation to return equivalent securities, since it no longer has unrestricted access to return the original asset itself.
5. Assess offsetting of repo and reverse repo balances against the strict IAS 32 criteria, a master agreement alone is not sufficient (see the offsetting considerations for financial assets and liabilities).

Measure the repo liability and reverse repo asset generally at amortized cost using the effective interest method, with the difference between the sale price and the agreed repurchase price recognized as interest expense (for the transferor) or interest income (for the transferee) over the term of the agreement, not as a trading gain or loss. Where securities collateral received under a reverse repo is repledged or sold by the transferee, measure and disclose the resulting obligation to return equivalent securities at fair value, tracking it separately from the reverse repo asset itself.

Disclose: (1) the carrying amount of assets transferred under repo arrangements that continue to be recognized because substantially all risks and rewards are retained; (2) the associated repo liabilities; (3) an explicit statement that the transferor has not derecognized the assets, with the rationale; (4) collateral pledged and received under repo and reverse repo arrangements, including amounts repledged or sold by the transferee and the related obligation to return equivalent securities; (5) interest income/expense recognized on reverse repo/repo balances during the period.

• Derecognizing securities sold under repo as if a true sale occurred, and correspondingly recognizing a security purchase for reverse repos, without properly evaluating retained risks and rewards based on the repurchase price mechanism
• netting repo assets and liabilities on the balance sheet without meeting the strict IAS 32 offsetting criteria (a master repo agreement alone does not suffice)
• failing to disclose repledged or sold collateral received under reverse repo arrangements and the corresponding obligation to return equivalent securities
• recognizing the repo/reverse repo spread as trading income rather than interest income/expense recognized over the term.