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Intermediate Accounting (Kieso)
Found in: Page 1031

Short Answer

What are the reporting issues in a sale with a repurchase agreement?

If a business sells a product one time and promises to buy it back the next, the legal title may have changed, but the economic basis of the contract is that the seller retains ownership risks.

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Step by Step Solution

Meaning of Repurchase Agreement

A repurchase agreement (repo) is a type of short-term financing for government securities dealers. Repo occurs when a dealer sells government securities to investors overnight and then buys them back the next day at a slightly higher price.

Reporting issues in a sale with a repurchase agreement

The legal title may have moved if a corporation sells a product one time and promises to purchase it back the next, but the economic essence of the deal is that the seller maintains ownership risks. Companies that sign into buyback agreements are authorized to transfer an asset to a client while still having an unconditional obligation (forward) or unconditional right (call option) to repurchase the asset later. The question in these cases is whether the corporation sold the asset. These transactions are reported as finance transactions (borrowing) in most cases. If the corporation has a forward obligation or calls the option to buy the asset for a price more than or equal to the selling price, the asset is considered to be in good condition.

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