A pension contract is a contract by which an entity sells and promises an asset or has the possibility (either in the same contract or in another contract) to buy back the asset. The asset repurchased may be the asset initially sold to the debtor, an asset essentially identical to the asset or other asset whose assets originally sold is an item. [IFRS 15:B64] In the second contract of the example, we find that the feed-in price is higher than the original selling price, which is why the company must recognize a financing agreement, as we have already seen in the table of reasons. A repurchase agreement usually involves the transfer of securities for cash. The amount of money transferred depends on the market value of the securities, net of a declared percentage intended to be used as a cushion. This cushion, called “haircut,” protects the purchaser if the securities need to be liquidated to be repaid. In addition, the ceding company agrees to buy back the securities at a higher price at a later date. The repurchase price is generally higher than the initial price paid by the purchaser, the difference being interest. Since the seller is contractually obliged to repurchase the securities at an agreed price, he retains much of the risk of ownership. To explain the difference between the sales bill and the secure loan, look at the example of Lehman Brothers, which used major repo programs before finally going bankrupt in 2008.
His practices are described in more detail in “How Lehman Brothers and MF Global`s Misuse of Repurchase Agreements Reformed Accounting Standards” on page 44 of this issue. In short, Lehman`s goal in using repo operations was to reduce the overall size of its balance sheet and reduce its leverage ratio, both of vital importance to maintaining a good credit rating. Guaranteed credit accounting does not achieve this objective and would result in unchanged leverage ratios. As a result, Lehman held a sales accounting with a buyout agreement. In this treatment, there is no recognition of a contractual obligation to repurchase in the balance sheet.