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The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) today issued common disclosure requirements that are intended to help investors and other financial statement users to better assess the effect or potential effect of offsetting arrangements on a company’s financial position. The eligibility criteria for offsetting are different in International Financial Reporting Standards (IFRSs) and U.S. Generally Accepted Accounting Principles (US GAAP).
Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). Unlike IFRSs, US GAAP allows 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 US GAAP, in January 2011 the IASB and the FASB issued an exposure draft that proposed new criteria for netting that were narrower than the current conditions currently in US 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 US GAAP.
The common disclosure requirements also improve transparency in the reporting of how companies mitigate credit risk, including disclosure of related collateral pledged or received. Further information is included in a project summary and feedback statement, also issued today.
Hans Hoogervorst, Chairman of the IASB, said: “These disclosures will help investors to bridge differences in the offsetting reporting requirements of IFRSs and US GAAP, while the additional requirements will also provide better information on how companies mitigate credit risk related to offsetting. That said, using disclosures to bridge differences in offsetting requirements was plan “B” for both boards.”
Leslie F. Seidman, Chairman of the FASB, said “The expanded disclosures are responsive to the feedback we received from investors, who wanted to understand both the gross and the net amounts for items offset in accordance with legally enforceable netting arrangements. We are also requiring expanded information about the collateral pledged and held in these arrangements.”
Companies and other entities are required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The required disclosures should be provided retrospectively.
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IASB clarifies its requirements for offsetting financial instruments
The International Accounting Standards Board (IASB) today 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 IAS 32 Financial Instruments: Presentation.
The amendments clarify:
- the meaning of “currently has a legally enforceable right of set-off”;
- that some gross settlement systems may be considered equivalent to net settlement. The amendments are effective for annual periods beginning on or after 1 January 2014 and are required to be applied retrospectively.
The amendments are part of the IASB’s offsetting project. As part of that project, today the IASB also separately issued Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7).
Source: International Accounting Standards Board
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