Definition
The term buyback agreement refers to a business arrangement whereby one party sells inventory to a second party, with the promise to repurchase the inventory at a future point in time. As part of a buyback agreement, the selling party is able to finance its inventory without reporting either the liability or asset on the company's balance sheet.
Explanation
Also known as a repurchase agreement and product financing arrangement, this type of transaction occurs between two parties. The first party "sells" their inventory to the second party, with an explicit promise to buy back the inventory at a predetermined price over time, or at a future point in time.
The benefits of such agreements include:
Buyer: the party purchasing the inventory is able to use this asset as collateral, obtaining a loan to repay the seller for the merchandise. As the seller repurchases the inventory, the money received from the seller is used to repay the loan.
Seller: by transferring inventory to the buyer, the seller is able to finance its inventory even though it's legally owned by the buyer. By entering into this type of arrangement, it may be able to avoid paying certain property taxes on goods held in inventory. The balance sheet of the seller also remains clear of the inventory and the associated liability.
In January 2013, the FASB proposed an amendment to the accounting model for repurchase agreements. The amendment would require repurchase or redeemed assets that meet all of the following criteria to be accounted for as secured borrowing:
The asset to be repurchased at settlement is identical to, or substantially the same as, the asset transferred at the beginning of the agreement or when the repurchase agreement is settled for cash.
The repurchase price is either fixed or readily determined.
The agreement to redeem or repurchase the asset is entered into contemporaneously with, or in contemplation with, the initial transfer of the assets.
Related Terms
The financial accounting term inventory is used to describe the balance sheet line item that includes the value of raw materials, work in process, finished goods ready for sale, and returned goods that can be resold.
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The term consigned goods refers to a marketing arrangement whereby one party provides merchandise to a second party, who is responsible for selling the merchandise. The seller of the merchandise is paid a commission, and may be reimbursed for selling expenses, in exchange for providing this service.Moneyzine EditorJanuary 11th, 2024
The term goods in transit refers to merchandise and other inventory items that have been shipped by the seller, but not yet received by the buyer. The value of goods in transit is an important component of a company's inventory, since the shipping arrangement will determine when legal title to the merchandise passes from the buyer to seller.Moneyzine EditorMay 31st, 2024
The term cost of inventory refers to the expenditures associated with merchandise placed in inventory. The categories of costs associated with inventory include manufacturing, product, and period costs.Moneyzine EditorJanuary 12th, 2024- The term special sales agreements refers to situations where legal transfer of ownership does not align with the economic risk of ownership. The three most common forms of these special sales agreements include installment sales, merchandise with high rates of return, and buyback agreements.Moneyzine EditorSeptember 21st, 2023
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