A financial institution (transferor) owns perpetual preferred stocks (that is, the preferred stocks have no mandatory redemption requirement) and transfers them at their original cost, which is higher than current market value. (Under the requirements of Statement 12, the portfolio of preferred stocks is carried at the lower of cost or market, and any excess of cost over market is included in a valuation allowance in equity.) As part of the "sale " agreement, the transferor simultaneously grants a put option to the transferee that allows the transferee to transfer the preferred stocks back to the transferor in the future at a fixed price. Copyright © 2010, Financial Accounting Standards Board Not for redistribution Page 1The length of the period during which the put option may be exercised varies from agreement to agreement; the put option may be exercisable anytime for a few months, a few years, many years, or only at specific points in time over a specified period. The issues are whether the transferor should account for the transfer as a sale or as a borrowing and, if the transfer is accounted for as a borrowing, how the preferred stocks should be reporte
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