On 28 January 2011 the International Accounting Standards Board (IASB) published for public comment an exposure draft on offsetting financial assets and financial liabilities. The US-based Financial Accounting Standards Board (FASB) will be publishing an identical exposure draft.
Under current accounting requirements, the circumstances when financial assets and financial liabilities may be presented on an entity’s balance sheet as a single net amount, or as two gross amounts, differs depending on whether the entity reports using International Financial Reporting Standards (IFRSs) or US generally accepted accounting principles (GAAP). The accounting differences result in the single largest quantitative difference in reported numbers in balance sheets prepared in accordance with IFRSs and US GAAP. This reduces the comparability of these balance sheets, and is especially prominent in the presentation of derivative assets and derivative liabilities by financial institutions. As a result, users of financial statements have requested that the boards find a common solution for offsetting these items. Proposing a common solution is also consistent with requests from the G20 and the Financial Stability Board.
The boards are proposing that offsetting apply only when the right of set-off is enforceable at all times, including default and bankruptcy, the ability to exercise this right is unconditional (it does not depend on a future event). The companies must intend to net settle, or simultaneously settle, the gross amounts. Provided all of these requirements are met, offsetting would be required.
The Exposure Draft was open for comment until until 28 April 2011.