Experts note that corporations will simply find or create new tricks
San Francisco, CA -- (SBWIRE) -- 01/23/2013 -- After MF Global used a little-known and obscure loophole, a U.S. Accounting standards body is proposing the tightening of such capabilities by companies and corporations.
The change was made by the Financial Accounting Standards Board, and would make it more difficult for a companies to use particular repurchasing agreements to move debt off their balancing sheet.
MF Global utilized the tool before it collapsed after investors and customers alike jumped ship following the firm's $6.3 billion debt to the European sovereign debt.
The case had become a political flash point, and investigators in congress, and elsewhere, attempted to identify the source of $1.6 billion in trading accounts.
MF Global had used repo accounting in order to keep sovereign debt off of the books, which made the firm appear as if it was less risky than it actually was, according to sources.
"What the FASB has proposed has significant potential to close the accounting loophole that MF Global exploited," said Bruce Pounder, a director of professional programs at SmartPros, which provides education to accounting professionals.
When a company utilizes this loophole, it partakes in what is called a repurchasing agreement (or repo). The company uses its assets as collateral to borrow, with an agreement for a future buyback. When a repo is used, the report is recorded as borrowings and thus do not move assets off the books. However, that is exactly what MF Global did when it used a variation of a repo agreement known as “repo-to-maturity.” In the RTM, the repurchase agreement expires at the same time as the collateral maturation. MF Global had simply recorded all repos as sales, and not borrowings, in order to keep them off the balance sheet.
According to the FASB's proposal, the maneuver will be much harder to make in the way that MF Global did, thus allowing for less obscurity in regards to risk and debt holding.
A particular problem that repo accounting has is that it has become so very complex. Even with proposed changes, firms will surely find new obscure rules and caveats to exploit, says J. Edward Kets, accounting professor at Pennsylvania State University.
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