Discuss the Three Types of Repurchase Agreements

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The Answer is Paragraph B65 identifies three types of repurchase agreement:(a)an entity's obligation to repurchase the asset (a forward);(b)an entity's right to repurchase the asset (a call option); and(c)an entity's obligation to repurchase the asset at the customer's request (a put option).If an entity enters into a contract (or contracts)that give rise to a forward or a call option,thencontrol over the asset transferred to the customer does not pass to the customer,even if thecustomer takes physical delivery of the asset.In these cases the entity does not account for thecontract as revenue,but as either (i)a lease arrangement if the entity can repurchase the asset forless than the original selling price,or (ii)a financing arrangement if the entity is obliged torepurchase the asset at an amount equal to or more than the original selling price (para.B66).Ineither of these cases,the effect of the time value of money is to be recognised (para.B67).Wherethe repurchase agreement is really a financing arrangement,then the entity must recognise afinancial liability for any payment received from the customer and continue to recognise in its ownrecords the asset that was 'purchased' by the customer.The difference between the considerationreceived and the consideration paid on repurchasing the asset must be recognised as interest(para.B68).In the case of a put option,where the repurchase price of the asset is less than the original selling price,the entity needs to decide at the start of the contract whether the customer has asignificant economic incentive to exercise the option.Where the entity forms the view that suchan incentive exists,it must account for the transaction as a lease because the customer is payingthe entity for the right to use the asset for a particular period of time (para.B70).Where thecustomer does not have a significant economic incentive to exercise the option,the entity accountsfor the contract as if it was a sale with a right of return (para.B72; see above). If the repurchase price of the asset in a put option is the same or more than the original selling price and it is also greater than the expected market value of the asset,the contract is accounted for as a financing arrangement and the entity must recognise a financial liability and an interestcomponent (para.B73).If,however,the repurchase price of the asset in a put option is the sameor more than the original selling price,but it is lower than the expected market value of the asset,then the customer has no significant economic incentive to exercise the option and the entity accounts for the contract as if it were a sale with a right of return (para.B74).

Discuss the Three Types of Repurchase Agreements

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