The new direction was surprisingly supported by financial institutions. Chart 3 summarizes responses received from the FASB from two requests for advice. The first exposure project for the purpose of effective control of pension operations (November 2010) is expected to change the criteria for the introduction of effective control. It resulted in comments containing proposals that were then included in the final standard (“FASB proposes new accounting guidelines for rest,” KPMG Defining Issues, January 2013, No. 13-6). In particular, the massive support for the proposal in 2010 should be highlighted. The eight responses of the public audit firm can be qualified either in favour of the proposal or in favour of the proposal. Out of a total of 19 responses, 16 can be labelled as preferred or qualified for the proposal. However, the second exhibition project, Effective Control for Transfers with Forward Agreements to Healthcare Assets and Accounting for Repurchase Financings (January 2013), received more mixed support.
A repurchase agreement usually involves the transfer of securities for cash. The amount of money transferred depends on the market value of the securities, net of a declared percentage intended to be used as a cushion. This cushion, called “haircut,” protects the purchaser if the securities need to be liquidated to be repaid. In addition, the ceding company agrees to buy back the securities at a higher price at a later date. The repurchase price is generally higher than the initial price paid by the purchaser, the difference being interest. Since the seller is contractually obliged to repurchase the securities at an agreed price, he retains much of the risk of ownership. While Lehman is an extreme example of aggressive use of rest for balance sheet management, it is unlikely that changes to the 2014 accounting rule prevented their collapse or the broader financial crisis of September 2008. First, the rules in force at the time of the bankruptcy excluded sales accounting in the United States for Lehman, which led the company to circumvent the rules by transferring the securities to its British broker. Second, Lehman`s bankruptcy was largely due to a significant drop in subprime market value, in which the company invested heavily.
If Lehman had used secured credit accounting and provided the guidance required by the new rules, the increased usefulness of the balance sheet would likely have more quickly drawn the attention of market participants to the company`s excessive borrowing, but this could not have avoided the resulting problems for Lehman or for the market as a whole.