January 10, 2012
New required disclosures about offsetting assets and liabilities
Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the balance sheet. Unlike International Financial Reporting Standards (IFRS), U.S. generally accepted accounting principles (GAAP) allow companies the option to present net in their balance sheets derivatives that are subject to a legally enforceable netting arrangement with the same party where rights of set-off are only available in the event of default or bankruptcy. To address these differences between IFRSs and U.S. GAAP, in January 2011 the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board issued an exposure draft that proposed new criteria for netting that were narrower than the conditions currently in U.S. GAAP. However, in response to feedback from their respective stakeholders, the boards decided to retain their existing offsetting models and instead issue new disclosure requirements to allow investors to better compare financial statements prepared in accordance with IFRSs or U.S. GAAP.
The requirements are set out in Accounting Standards Update 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, and in amendments to Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). The new requirements state that entities must disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet, and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope of the requirements includes derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The requirements are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods.
Also, the IASB clarified its requirements for offsetting financial instruments by issuing Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32). The amendments address inconsistencies in current practice when applying the offsetting criteria in International Accounting Standard (IAS) 32, Financial Instruments: Presentation. The amendments clarify the meaning of "currently has a legally enforceable right of set-off," and that some gross settlement systems may be considered equivalent to net settlement. The amendments are effective for annual periods beginning on or after January 1, 2014.