The Effect of Statement of Financial Accounting Standard 125 on Repurchase Contracts

Abstract

Statement of Financial Accounting Standards No. 125 (SFAS 125), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, introduced a control‐oriented “financial‐components” approach. SFAS 125 provided guidelines on when financial assets should be removed from the balance sheet (derecognized) and the resulting gain or loss recognized. Stated differently, when certain conditions were met, the transfer of financial assets was considered a sales (or derecognition) transaction and should have been treated accordingly. Even when financial assets were not considered sold (derecognized), SFAS 125 specified conditions, that when met, required specific measurement and disclosure of financial assets (different from normal borrowing transactions). Repurchase contract conditions in most cases were subject to different accounting treatments according to SFAS 125; they were not to be treated as sales transactions.