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Add initials Repurchase Agreement

hello and welcome to the session in which we will discuss repurchase agreements also known as repo or repo agreements what is a repurchase agreement a repurchase agreement simply put as the definition implies i'm gonna sell you something sell you let's assume a piece of inventory for 100 you're going to give me cash today so in return you're going to give me cash for 100 but the transaction is not is not finished yet then we have an agreement on the side i'm gonna buy back the same inventory from you for 106 dollars therefore what i will do you will i will you will give me back that inventory and i will give you back 106 dollars so hold on a second why are we doing this why would i sell you something for a hundred buy back at 106. well that's not really a sale what you are technically doing is borrowing money this is a finance transaction so why is this important it's important for revenue recognition we want to know whether the company is entering into a repo agreement or is this transaction a sale so the company transfer or sells an asset to a customer but they have an unconditional obligation or a right so they have to buy it back they have the right to buy it back or if they choose or they have an unconditional obligation they have to buy it back the asset at a later date if the amount of the repurchase is greater than or equal to the selling amount then that's not that wasn't really a sale what that was is a financing transaction you're borrowing money but disguising it as a sale so you cannot do that why is this important why this topic is important well if you know anything about the financial crisis of 2008 one of the companies that went bankrupt and basically almost brought the whole market with it is a company called an investment firm called lehman brothers so what did lehman brothers do lehman brothers sold and quote sold their bad investments before they issued their financial statements through repo agreement what does that mean well here's what they did so lehman had hondur books bad investments specifically bad investments and bonds and those bonds that are backed up by mortgage-backed securities so what happened is this right before the end of the year they wanted to make those investment disappear so when the auditor value the company when the auditor you know look at their financial assets those assets don't even exist so what they did they found a counterparty another bank and they told the bank look we're going to give you for example billions worth of those bonds so we're going to give you our bonds as an investment and they're worth 105 whatever they're worth it doesn't matter let's assume they're worth 105 dollars we're just we're going to give give it to you now...