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Asset and liability offsetting

IASB Meeting Summaries and Observer Notes


 IASB / FASB July 2011


 

 

The IASB and FASB discussed revisions to the proposed offsetting disclosures. The boards tentatively decided to:

a. retain the objective for the offsetting disclosures, namely, 'An entity shall disclose information about rights of set-off and related arrangements (such as collateral arrangements) associated with the entity's financial assets and financial liabilities to enable users of its financial statements to understand the effect of those rights and arrangements on the entity's financial position';

b. modify the scope of the disclosure requirements so that they apply only to instruments under an enforceable master netting agreement or similar arrangement (eg derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, securities lending arrangements), and

c. clarify that an entity need not provide the required disclosures if the entity 'has no qualifying assets or liabilities that are subject to a right of set-off (other than collateral agreements) at the reporting date.'

This decision was supported by all members of the IASB and six members of the FASB.

The boards also tentatively decided to require entities to disclose the following:

a. the gross amounts of financial assets and financial liabilities,

b. the amounts of financial assets and financial liabilities offset in the statement of financial position,

c. the net amount after taking in account (a) and (b), (which should be the same as the amounts reported in the statement of financial position),

d. the effect of rights of set-off that are only enforceable and exercisable in bankruptcy, default, or insolvency of either party not taken into account in arriving at the amounts presented in the statement of financial position (including collateral) and

e. the net exposure after taking into account the effect of items (b) and (d).

This decision was supported by 14 members of the IASB and 6 members of the FASB.

 

IASB only sessions

Following the boards' preference for different offsetting approaches and hence the decision not pursue a common offsetting model (at the June 2011 joint meeting), the staff asked the IASB to reconfirm whether they would like to:

a. move forward with the exposure draft Offsetting Financial Assets and Financial Liabilities, as modified, or

b. retain the current offsetting requirements in IAS 32 Financial Instruments: Presentation.

Moving forward with the exposure draft would involve finalising the offsetting approach that was proposed in the ED, with some clarifications. The ED proposed requiring an entity to offset a recognised financial asset and a recognised financial liability when the entity:

a. has an unconditional and legally enforceable right to set off the financial asset and financial liability and

b. intends either:

    i. to settle the financial asset and financial liability on a net basis or

    ii. to realise the financial asset and settle the financial liability simultaneously.

IAS 32 requires that a financial asset and a financial liability must be offset in the statement of financial position when and only when the entity:

a. currently has a legally enforceable right to set off the recognised amounts; and

b. intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Eight members supported retaining the existing requirements, with seven supporting completing the ED. However, the Board also noted that during the project inconsistencies in the application of the offsetting requirements in IAS 32 were highlighted. The Board therefore asked the staff to prepare a paper that would consider whether those inconsistencies should be addressed and, if so, how.

 

Date: 7/21/2011