SEC to CFOs: More Repo Disclosure

In its latest "Dear CFO" letter, the SEC is seeking more information on why some repurchase agreements are being booked as sales.

The Securities and Exchange Commission is asking public-company CFOs for additional information about repurchase agreements, or repos, the transactions Lehman Brothers used to make its balance sheet look healthier before the investment bank collapsed into bankruptcy.

The SEC wants companies to help it “better understand” the accounting treatment used to record repos, and to provide details about how management determines whether to record a repo as a sale or a collateralized financing. The commission would like to know, for example, how many repos qualified for sales-accounting treatment each quarter for the past three years, whether those sales were concentrated with certain counterparties or countries, the business reason for structuring such transactions as sales, and whether a company has changed its original accounting treatment for any of the repos.

Issued in March in the form of a “Dear CFO” letter, the SEC’s request for additional information seems “granular and broad at the same time,” says Wallace Enman, a vice president and senior accounting analyst with Moody’s Investors Service. He says that if companies were to use the letter as a guide, they would create “relatively robust” disclosures about repos. A sample letter was posted on the SEC’s Website on Monday.

While SEC comment letters are usually directed at a single company, Dear CFO letters cover issues that affect a large swath of companies. But the repo letter “is not a typical Dear CFO letter where we provide companies with our views on accounting and disclosure matters they should consider,” says commission spokesman John Nester. “In this case, we are seeking very specific information from companies about repurchase agreements and similar transactions.”

Nester says that based on company responses, the SEC could ask issuers to amend their filings or modify disclosures in future filings. But so far the commission has not concluded that any company has failed to comply with generally accepted accounting principles, violated any SEC rules, or failed to provide appropriate disclosures.

This isn’t the first time the SEC has questioned companies about the way they apply asset-transfer accounting rules. Since 2004 the SEC has exchanged 171 comment letters with 93 different companies about whether agreements to transfer financial assets are treated as a sale or a temporary transaction under U.S. GAAP, according to research firm Audit Analytics.

For his part, Enman says the questions are the SEC’s way of making sure Lehman’s so-called Repo 105 technique doesn’t go unnoticed. Indeed, in an interview with CNBC this week, SEC chairman Mary Schapiro said the commission is looking at all the issues surrounding Repo 105, both at Lehman and other financial institutions. “We want to make sure their accounting and disclosures are accurate when it comes to characterizing repurchases,” she said.

One for the Books

Far from going unnoticed, Lehman’s Repo 105 transactions are destined to take a prominent place in the annals of accounting scandals — somewhere between Enron’s infamous special-purpose entities and AIG’s booby-trapped credit-default swaps.


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