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financial reporting Case Study

Category: Geography Pages: 6 Type: Case Study Level: Undergraduate
The accounting treatment for this type of accounting transaction is provided in (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”, providing two accounting treatments applicable to such transfers. Under this standard, the transferor would account for the transferred assets as collateral provided to obtain a cash loan from the transferee. Additionally, in some cases, the transferor would account for the transfer as cash sales of assets. In addition, in repo accompanied transfer, the transferor could account for as a sale rather than borrowing if the value of transferred financial assets was more than 102% of the sum of cash received. Lehman carefully planned to reduce the impacts of short term debt on its balance sheet. Nothing more served in its deceptive planning than the loophole in SFAS No. 140! In order to minimise the impacts of the marketable securities on the balance sheet, just before the end of the each quarter, Lehman transferred marketable securities to unrelated counter parties, at the same agreeing to repurchase securities in a specified period of time. And, Lehman accounted for such transfers as sale rather than borrowing. Because of this sale of securities, Lehman became able to fulfil its short term debt needs. Then, after close of each quarter, Lehman incurred new short-term debt to repurchase the transferred securities, which were sold before the end of the quarter and were shown as a sale, from the counterparty. Consequently, the accounting treatment of the Repo 105 asset-transfer and the transactions of debt-reduction, and the timing of the accounting treatment were used in a way that neither the transferred