About the project
This project has now been completed. On 16 December 2011 the IASB and FASB issued common disclosure requirements that are intended to help investors and other users to better assess the effect or potential effect of offsetting arrangements on a company's financial position. The new requirements are set out in Disclosures-Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). As part of that project the IASB also clarified aspects of IAS 32 Financial Instruments: Presentation. The amendments address inconsistencies in current practice when applying the requirements.
For more information, download the feedback statement or listen to a podcast [accessible via the links on the right-hand side].
Background
Offsetting, otherwise known as netting, takes place when entities present their rights and obligations to each other as a net amount in their statements of financial position.
In January 2011 the IASB and the FASB published the exposure draft (ED) Offsetting Financial Assets and Financial Liabilities. This was in response to requests from users of financial statements and recommendations from the Financial Stability Board to achieve convergence of the boards’ requirements for offsetting financial assets and financial liabilities.
The offsetting model in IAS 32 Financial Instruments: Presentation requires an entity to offset a financial asset and financial liability when , an only when, an entity currently has a legally enforceable right of set-off and intends either to settle on a net basis or to realise the financial asset and settle the financial liability simultaneously.
The US GAAP offsetting model, while similar to the model in IFRSs, also provides a broad exception which permits entities to present derivative assets and derivative liabilities subject to master netting arrangements net in the statement of financial position even if an entity doesn’t have a current right or intention to settle net.
The different requirements result in a significant difference between amounts presented in statements of financial position prepared in accordance with IFRSs and amounts presented in statements of financial position prepared in accordance with US GAAP, particularly for entities that have large amounts of derivative activities. The proposals in the exposure draft would have replaced the requirements for offsetting financial assets and financial liabilities and would have established a common approach with the FASB.
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Proposals
The ED proposed that offsetting should only apply when: an entity’s right of set-off is enforceable at all times (including in the events of default and bankruptcy) for all counterparties, the ability to exercise this right is unconditional (it does not depend on a future event), and the entity intends to settle the amounts due with a single payment or simultaneously. If all of these criteria were met, offsetting would have been required. The proposals would have amended IFRSs and US GAAP and eliminated several industry-specific netting practices.
The ED also proposed disclosures that would have required the disclosure of information about the effect of rights of set-off and related arrangements on an entity’s financial position. The disclosures would have applied to all recognised financial instruments with rights of set-off and/or collateral agreements, and would have been required by class of financial instrument.
Comment letters
The comment letter period for the ED closed on 28 April 2011. The boards and staff received 162 comment letters on the proposals.
Click here for a summary of the comment letter respondents by type and geography of constituent.
The boards and staff conducted extensive outreach on the proposals during the ED comment period. The IASB and FASB staff met with users of financial statements (including asset managers, analysts, rating agencies and regulators) preparers, auditors, standard setters, lawyers and various industry groups in Asia, Africa, North and South America and Europe.
Click here for a summary of the outreach by type and geography of constituent. Click here to read a summary of outreach activity to May 2011.
User survey
The IASB also published a web-based survey for investors to give their views on the offsetting proposals and to explain the information those investors use when reviewing financial statements. The majority of respondents to the survey (53%) were equity investors or analysts, with 33% being both debt and equity users. Most of the respondents were from Asia (44%), with 42% from Europe/Africa, 8% International and 6% from the Middle-East. The survey closed on 28 April 2011.
Round tables
In May 2011, the boards held public round tables in London, Singapore and Norwalk. The purpose of these meetings was to listen to the views of, and obtain information from, interested parties about the proposed requirements.
Redeliberations
In June 2011, in the light of feedback received on the ED, the boards decided to move forward separately with their respective offsetting models. The boards also noted that users of financial statements consistently asked for information to help them compare amounts that are presented in statements of financial position prepared in accordance with IFRSs with the amounts that are presented in statements of financial position prepared in accordance with US GAAP. To meet the needs of users of financial statements, the boards agreed on common disclosure requirements by amending and finalising the disclosures initially proposed in the ED.
Inconsistencies in applying the offsetting criteria in IAS 32 were also highlighted during the outreach on the ED. As a result in July 2011 the IASB agreed to amend the application guidance to IAS 32 to clarify :
- the meaning of ‘currently has a legally enforceable right of set-off’; and
- that some gross settlement systems would be considered equivalent to net settlement if they eliminate or result in insignificant credit and liquidity risk and process receivables and payables in a single settlement process or cycle.
Final amendments
In December 2011 the IASB issued Disclosures-Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). The new disclosures will provide users of financial statements with information about the effect or potential effect of netting arrangements on an entity’s financial position. These disclosures will also provide comparable information between financial statements prepared in accordance with IFRSs and those prepared in accordance with US GAAP. The disclosures apply to:
- All financial instruments set off in the statement of financial position in accordance with IAS 32, and
- Financial instruments subject to a master netting arrangement or similar agreement even if not set off in the statement of financial position.
They do not apply to:
- Financial instruments with only non-financial collateral agreements,
- Financial instruments with financial collateral agreements but no other rights of set-off, and
- Loans and customer deposits with the same financial institution (unless they are set off in the statement of financial position).
In December 2011 the IASB separately issued Offsetting Financial AssetsandFinancial Liabilities (Amendments to IAS 32) to clarify the application of certain offsetting criteria in IAS 32, namely:
- the meaning of ‘currently has a legally enforceable right of set-off’; and
- that some gross settlement systems would be considered equivalent to net settlement if they eliminate or result in insignificant credit and liquidity risk and process receivables and payables in a single settlement process or cycle.
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