Final answer:
Reporting issues in a sale with a repurchase agreement include revenue recognition problems, balance sheet presentation questions, and disclosure requirements. These issues arise due to the complexity of determining whether the transaction is an actual sale or a financing transaction. Imperfect information further complicates price agreement between buyer and seller.
Step-by-step explanation:
Reporting issues in a sale with a repurchase agreement often stem from determining whether the transaction is a true sale or a financing arrangement. These repurchase agreements, also known as repos, involve a company selling assets with the agreement to buy them back at a later date for a set price.
The three main reporting issues that arise in this scenario include:
- Revenue recognition: How and when the company should recognize the revenue from the sale. Since the seller agrees to repurchase the asset, it may need to be treated as a collateralized financing transaction rather than a true sale.
- Balance sheet presentation: Whether the assets should remain on the seller's balance sheet if control has not substantially transferred to the buyer due to the repurchase agreement.
- Disclosure requirements: Ensuring transparency in financial statements about the company's obligations under the repurchase agreement and its impact on the company's financial position and cash flows.
Furthermore, when a large number of shareholders own a company, imperfect information may affect transactions.
For instance, when imperfect information exists, it can be difficult for a buyer and seller to agree on a price due to the challenges in ascertaining the asset's true value, leading to pricing disagreements. To mitigate concerns related to imperfect information, a borrower may provide additional assurances to a bank for a loan, such as collateral, credit enhancements, or detailed financial information.