Repo accounting up for review

Lehman Brothers

The world”s most senior standard setters are today expected to begin to
review the accounting that was used by Lehman Brothers for the now notorious
repo transaction that helped bring down the bank.

Members of the International Accounting Standards Board are due to meet today
in London with their opposite numbers from the US’ Financial Accounting
Standards Board.

The IASB and FASB are due to discuss recognition and securitization at
today’s meeting.

Repo transaction hit the headlines last month when US bankruptcy examiner
Anton Valukas published a 2,000 page report on the collapse of Lehman.

In the report Valukas alleged the bank used a key accounting treatment for
repo transaction to keep risky assets off its balance sheet.

Repo arrangements are transaction in which assets are sold with an agreement
to buy them back as a means of raising short-term funding.

However, in Lehman’s case, the bank offered assets worth 105% of the cash
received in return. Because of that the bank could argue that it did have enough
cash to buy back the assets, had “lost control” of them and therefore they could
be taken off the bank’s balance sheet.

Lehman used this accounting treatment to move $50bn off its balance sheet at
one stage.

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