DipIFR Syllabus B. Elements of financial statements - Repurchase agreements - Notes ^{6 / 8}

A Repo Agreement is a contractual arrangement between two parties:

1. Assets owner (Borrower of cash)
   The assets owner sells securities (Financial assets) to an investor

2. Investor (Lender of cash)
    
   The investor buys securities

The Assets owner sells the Financial assets  to investors, usually on an overnight basis, and buys them back the following day at the same price, plus interest on the sale proceeds

Repurchase Agreements provide an opportunity for financial institutions such as banks or mutual funds to lend excess funds on a short term basis in a secure manner.

Based on IFRS 15,  the repurchase transaction should be treated as a financing arrangement that does not give rise to revenue.

Therefore, no revenue would be recognised and the “sale proceeds” would be treated as borrowing.

The borrowing is to be treated as a financial liability measured at amortised cost

In the books of the borrower, the bonds will be shown as an asset and the cash received from the lender would be shown under the liability side as a “Borrowing under repurchase agreement”

Accounting for

1. On-balance sheet (Financial Assets):
   If the financial asset (Bond) is sold under a repurchase agreement, it cannot be derecognised from the books as the transferor retains substantially all the risks and rewards of ownership.

   An accounting entry appears as secured loan and not as a “sell” transaction. 

   Bonds given as collateral remain on the balance sheet.

2. Recognition of sale proceeds as a financial liability
   DR Cash / CR Financial liability

3. Profit & loss account (Interest)
   Repo interest is treated as payment of interest on accrual basis.

   Recognition of interest expense
   DR Interest expense / CR Financial liability