• Discussed at June 2010 Joint IASB-FASB Meeting (jump to notes below)
• Added to agenda June 2010
• 28 July 2010 - User survey published (details)
• Discussed at September 2010 IASB Meeting (jump to notes below)
• Discussed at October 2010 IASB Meeting (jump to notes below)
• Discussed at November 2010 IASB Meeting (jump to notes below)
• Discussed at December 2010 IASB Meeting (jump to notes below)
• IASB publishes exposure draft on offsetting — January 2011 (details)
• Discussed at May 2011 IASB Meeting (jump to notes below)
• Discussed at Special 31 May - 2 June 2011 IASB Meeting (jump to notes below)
• Discussed at June 2011 IASB Meeting (jump to notes below)
• Discussed at July 2011 IASB Meeting (jump to notes below)
• Discussed at Special 28 July 2011 IASB Meeting (jump to notes below)
• Discussed at September 2011 IASB Meeting (jump to notes below)
• Discussed at November 2011 IASB Meeting (jump to notes below)
• 16 December 2011 - IASB amends offsetting rules in IAS 32 and amends disclosure requirements (details)

Timetable

• Click for IASB Project Timetable

IASB Project Insights

• A quick overview of this project is available on our IASB Project Insights page

Discussion at the June 2010 Joint IASB-FASB Meeting

Initial discussion: Project background and scope

The staff reminded the Boards that they had invited representatives from banks, industry groups (International Swaps and Derivatives Association) and legal experts (in international financial law) to participate in an education session at the joint board in February 2010. A project on balance sheet offsetting was added to the FASB's agenda in February 2010 when it considered that it would be more appropriate to review broadly the general principles/ criteria in current US GAAP that permit offsetting in the balance sheet. This session was intended to help the IASB and FASB staff to plan the project, should the IASB add it to its Agenda.

Much of the discussion focused on Master Netting Arrangements and similar offsetting arrangements. In an effort to direct the Board's intentions, senior IASB staff noted that both Boards should identify the problem trying to be solved. In particular, offsetting arrangements are proving a particular concern for financial instruments in large multi-national banks, where similar institutions often report very different financial statements.

The IASB Chairman suggested that financial instruments and commodities should be the focus. Other Board members agreed, but suggested that a final check for 'weird and funky non-financial items' that should be in the scope should be conducted later in the project.

The staff asked Board members to raise their top issues with them, so that the project plan could be as well-structured as possible, meaning that a minimum of Board time could be used up. Responding to this invitation, the following issues were suggested for consideration:

• The legal status of Master Netting Arrangements in various jurisdictions, in particular the right of offset within and outside such arrangements;
• The right of offset in corporate lending transactions (for example, the lender's recourse to the borrower's deposits with the same institution);
• The treatment of derivatives, in particular in derivative clearing houses and recognised exchanges (such as Futures Exchanges) – this issue goes to whether there is real credit and liquidity risk in the off-set provisions.

There seemed to be a preference that this project be narrow in scope-focused on offsetting for financial instruments and commodities, rather than the right of off-set generally.

The IASB has still to complete its due process associated with adding a topic to its Agenda. It is likely that this issue will be discussed with the IFRS Advisory Council at its meeting 21-22 June.

July 2010: IASB seeks user views on the offsetting of assets and liabilities

On 28 July 2010, the IASB published a questionnaire for financial statement users regarding the offsetting of financial assets and liabilities. The survey focuses on whether and how users of financial statements adjust for offsetting of financial instruments.

This project was added to the agenda at the June IASB-FASB meeting in response to stakeholder concerns (including those of the Basel Committee on Banking Supervision and the Financial Stability Board) about differences between IFRS and US-GAAP standards on balance sheet netting of derivative contracts and other financial instruments that can result in material differences in financial reporting by financial institutions.

The questionnaire is targeted at users of financial statements, requesting feedback in areas such as:

• Which of gross or net values of financial asset and liability positions, and in particular derivatives, is useful for financial statement analysis
• Whether gross or net values should be presented on the face of the statement of financial position (balance sheet)
• When offsetting (netting) should be permitted (conditional or unconditional rights, different types of risk).

The deadline to complete the questionnaire is 20 August 2010. The questionnaire can be accessed through the IASB website.

Discussion at the September 2010 IASB Meeting

The staff presented to both the IASB and FASB the results of outreach activities performed in July and August 2010 related to offsetting of financial assets and liabilities. Those outreach activities included meetings with analysts from asset management firms, investment banks, and rating agencies as well as an online user survey. The FASB staff also met with the FASB's Investors Technical Advisory Committee while the IASB staff met with members of the Corporate Reporting Users' Forum.

The summary of the feedback provided to the Boards was that there was no general consensus in the views of users. Credit analysts would prefer to see both the net (on balance sheet) and gross (in footnote disclosure) exposure for derivatives; however, equity analysts would prefer having the gross exposures on the face of the balance sheet. The areas where there was some amount of consistency in user preferences include achieving convergence, needing both the gross and net presentation (between the balance sheet and the footnotes), if net presentation is allowed - making it a requirement rather than an election, requiring specific disclosures, and differentiating between derivatives and loans and deposits.

The staff had differing views on whether offsetting provided decision useful information and was appropriate under the conceptual framework. Some staff felt that offsetting was not in line with the conceptual framework while others believe offsetting is a result of credit mitigation strategies and that net presentation provides more useful information and is appropriate in the circumstances.

The staff asked the Board for their views on how to proceed given the divergent views of the staff and the lack of consensus from users. Various views were discussed by the Board on when and if offsetting would be appropriate. Some focused on the current differences between IFRS and U.S. GAAP (that being the FASB's exception of the intention to net settle consideration when a Master Netting Agreement is utilised).

An IASB Board member introduced new concepts for an offsetting model which received support from some other IASB Board members. The proposed concept included ignoring the current intent and ability to net settle but instead requiring that the contracts be settled on the same day, with the same counterparty and be subject to the same risk (e.g., interest rate risk). Others supported these concepts but felt that intent and ability must also be a consideration.

One of the FASB Board members mentioned that the two Boards were currently converged in their general principal to net presentation. Where they differed was in the FASB's exception to the principal when a Master Netting Agreement was in place. The Board member asked for clarification on whether the two Boards were trying to resolve their current differences (e.g., the exception to the principle) or developing an entirely new principle behind net presentation as they were willing to revisit the current exceptions but had concern with revisiting the current principle.

Another FASB Board member questioned the concept of the same risk being required to achieve offsetting. He used the example of a cross currency interest rate swap that was subject to two risks (interest rate risk and foreign exchange risk) and asked whether it would ever be permitted for offsetting.

The Boards ultimately agreed that having the ability to net settle and the contracts being with the same counterparty were fundamental to achieving offsetting. Areas remaining for discussion at future Board meetings include:

• whether intention to net settle should be required,
• whether the contracts require settlement simultaneously (e.g., the same day),
• whether the contracts are exposed to the same risk, and
• when net settlement only occurs upon insolvency or default, whether that would allow for offsetting.

Discussion at the October 2010 IASB Meeting

The Boards considered the conditions necessary for offsetting financial assets and liabilities. The Boards discussed six potential conditions that could be considered as conditions for offsetting and their interaction. These conditions included:

1. whether the parties need to have the ability to offset or settle net
2. whether the parties need to demonstrate an intent to settle net
3. whether the amounts owed under the respective contracts ought to be settled on the same date or be settled simultaneously
4. whether the financial asset and liability ought to have the same maturity
5. whether the financial asset and liability ought to have the same underlying risk; and
6. whether offsetting should be on the basis of bilateral or multilateral netting arrangements.

Several Board members noted that the right of offset must be substantive and this assessment might be complicated by enforcement of offsetting in different jurisdictions.

The Boards agreed that when the parties have the substantive unconditional right (ability) of offset and they have the intent to net settle offsetting should be required. In this case no other conditions would be required.

The Boards also discussed situations when parties have the unconditional right (ability) of offset and enter into transaction simultaneously. The Boards discussed what does simultaneously mean (at the same moment vs. the same date). The Boards considered the exposure to counterparty, credit and liquidity risk in this situation but did not reach any conclusion. The Boards asked the staff to further analyse the issue and will revisit the issue at their November meeting.

The Boards continued their discussion with the netting when parties have the conditional right (ability) of offset (conditional on bankruptcy). Several Board members noted that other conditions would need to be fulfilled in this situation (i.e. the same day, the same maturity and the same underlying risk). Other Board members disagreed. They noted that offset is applicable only on bankruptcy and considering this conditionality is inconsistent with the principle of going concern. In addition, they noted that the counterparties would exchange gross cash flows payments in the meantime.

The Boards asked the staff to further analyse the issue and will revisit the issue at their November meeting.

The Boards asked the staff to prepare three options for the November meeting covering netting in the three situations covered. Some Board members expressed their concerns that the emerging consensus seems to be to allow netting in fewer situations than is the current practice under both IFRSs and US GAAP and limit it virtually to payment netting. The Boards will discuss these issues at their November joint meeting.

Discussion at the November 2010 IASB Meeting

The Boards continued discussions on the appropriateness of offsetting of financial assets and financial liabilities. Discussions were focused on the following three topics:

• the appropriateness of netting in circumstances in which there is an unconditional right and intention to offset
• whether an entity should offset a recognised asset and liability if it has an unconditional right to offset and intends to settle the asset and liability simultaneously
• the appropriateness of offsetting when an entity has a conditional right to offset.

Primary Model – Unconditional Right and Intention to Offset

The staff believes that an unconditional right and intention to offset should form the primary basis for developing an offsetting model under the joint project. The staff noted this viewpoint is consistent with the Boards' joint Framework, is currently required under IFRSs, and is currently permitted under U.S. GAAP. Both Boards supported the staff's conclusions and recommendation; the IASB by a vote of 14-1 and the FASB by a unanimous vote.

One IASB member asked the staff what was meant by the term "primary" when describing the basis for a model, and whether that implied there were secondary or other bases for a model. After discussion, the staff clarified the unconditional right and intention to offset should be the starting point for a model under the project. A FASB member noted that the basis for a netting model was dependent upon the intent of the presentation (e.g., to show risk exposures or information about assets and liabilities). The Boards discussed the definition of intent, and some Board members expressed a belief that intent could be demonstrated through operational factors, such as an entity's historical practices, the execution of contracts that require net settlement, or other means. The Boards then discussed whether any operational concepts should be incorporated into a netting model. When called to a vote, both the IASB and FASB unanimously voted against such a measure, with some members citing the question was more akin to an auditing issue.

Next, the staff recommended to the Boards that offsetting should be required (consistent with current IFRS) if the offsetting criteria are met. The staff noted that making offsetting optional (i.e. the current practice under U.S. GAAP) would lead to diversity in practice; requiring offsetting would eliminate this diversity and provide more useful information to financial statement users.

Both Boards voted unanimously in favor of the staff's recommendation.

The staff also asked the Boards whether they agreed with defining the term unconditional as "a right of offset that is enforceable in all circumstances (including bankruptcy of a counterparty)". Both the IASB and FASB voted in unanimous support of the staff's recommendation.

Simultaneous Settlement of a Financial Asset and Liability

The staff asked the Boards whether an entity should offset a recognised financial asset and financial liability if the entity has an unconditional right to offset and intends to settle the asset and liability simultaneously.

The staff explained to the Boards that the term "simultaneously" is meant to be "at the same moment", when there is no exposure to liquidity risk or credit risk. One IASB member questioned whether a bright line would ultimately be created in practice through the interpretation of "simultaneously" and/or "at the same moment." Another IASB member asked the staff if it was aware of any current practice issues on the matter under IAS 32; the staff indicated that it was not aware of any significant issues. Another Board member asked the staff if the simultaneous settlement question represented an alternative or a refinement to the intent and ability (i.e. unconditional right) guidelines. The staff indicated offsetting in the event of a simultaneous settlement was meant to be a refinement, and stated its belief that this refinement would allow for more offsetting in practice.

The IASB voted 10 - 5 that an entity should offset a recognised asset and liability if the entity has an unconditional right of offset and intends to settle the asset and liability simultaneously. The FASB also voted in favor of this alternative by a vote of 3 – 2.

Offsetting with the Conditional Right to Offset

Next, the Boards discussed whether offsetting would be appropriate given a conditional right of offset. The staff noted that a conditional right of offset focuses on an expected outcome in the event of a default or the termination of a contract, for example, the use of close-out netting in the event of a bankruptcy. For purposes of the discussion, the staff presented the Boards with three alternatives:

• Alternative 1: Allow netting when an entity has a conditional right of offset (similar to current U.S. GAAP)
• Alternative 2: Allow netting when an entity has a conditional right of offset and the contracts have the same risks or critical terms, or the instruments are the same
• Alternative 3: Do not allow any netting if the entity does not have an unconditional right of offset (most similar to current IFRSs).

In stating a preference for Alternative 3, one IASB member noted that an entity should only offset if it has the intent and ability throughout the life of a contract. A FASB member agreed with the IASB member, indicating that close-out netting already represented an unconditional right, but the necessary event had not yet occurred to trigger the right. The FASB member also stated that an entity should not net contracts in a current period based on an event (i.e., a default, etc.) that has not yet occurred.

While indicating a preference for Alternative 2, an IASB member also emphasised the need for a final standard to include robust footnote disclosures that will provide users with useful information such as an entity's risk exposures, netting strategies, etc. Multiple board members agreed with this point, with one member noting footnote disclosures will be important regardless of which alternative the Boards agreed upon.

Multiple Board members reiterated that one of the underlying reasons for the offsetting project was to bring about convergence between IFRSs and U.S. GAAP. They noted that support for Alternative 3 appeared to achieve this goal. Two FASB members also stated their desire to achieve convergence; however, they noted that Alternative 3 would be a departure from current U.S. GAAP, and they questioned whether U.S. constituents had expressed any significant concerns about current U.S. GAAP requirements. One of these FASB members expressed a preference to retain the current U.S. GAAP model.

By a vote of 14 – 1, the IASB favored Alternative 3. The FASB voted in favor of Alternative 3 by a vote of 3 – 2.

Discussion at the December 2010 IASB Meeting

Multilateral netting arrangements

The IASB and FASB have previously agreed to the criteria that require offsetting within the financial statements (unconditional right of offset and intention to either settle the asset and liability net or settle simultaneously). However, the Boards had not yet addressed whether that requirement would apply only to bilateral arrangements (between two counterparties) or also apply to multilateral arrangements (between multiple counterparties). IAS 32 currently permits multilateral arrangements to achieve offsetting while US GAAP limits offsetting to only bilateral arrangements.

An IASB member requested clarification that under a multilateral arrangement, the same criteria would apply (unconditional right of offset and intention to either settle the asset and liability net or settle them simultaneously) and the staff confirmed that would be the case.

A FASB member asked how the multilateral arrangement would apply to an example of an insurance arrangement as he felt those arrangements should be presented on a gross basis, but the staff clarified that insurance contracts would not be financial instruments and therefore outside the scope of the offsetting proposals.

Several of the staff examples of multilateral arrangements involved transactions within a group structure such that the netting would be relevant in the separate financial statements. The acting Chair of the FASB mentioned that she would prefer to limit offsetting to bilateral arrangements and deal with related party issues separately rather than expanding the offsetting provisions to multilateral arrangements. However, the IASB staff noted that multilateral arrangements often happen outside the group context, in particular for structured transactions which involve multiple counterparties and have terms established that require settlement directly between counterparties.

Both the IASB and FASB agreed to require offsetting for both bilateral and multilateral arrangements when the criteria are met.

Disclosure requirements

During the early part of the offsetting of financial instruments project, the staff had provided the Boards with disclosures from several banks on the information provided around offsetting.

In considering the scope of the disclosure requirements related to offsetting, the staff recommended a disclosure objective "to provide users of financial statements with information that enables them to evaluate the extent of credit risk associated with an entity's financial instruments, how the entity manages those risks and the specific strategies employed in managing those risks." The staff's proposed disclosures include specific requirements and tabular formats for 1) non-derivative financial assets, 2) derivative assets, 3) derivative liabilities, and 4) credit derivatives and similar instruments, and qualitative information on an entity's strategy for managing credit risks.

Several IASB and FASB members expressed concern with the staff proposals feeling they overreached the intended scope of the offsetting project. The disclosure proposals do not solely address offsetting arrangements but instead address credit risk more broadly. They felt that the consideration of these disclosures should be performed as a comprehensive review of IFRS 7 or the various disclosure requirements within US GAAP rather than as part of the offsetting project simply because it is currently open on the Boards' agenda.

A FASB member mentioned that the examples provided by the staff were all for banks but that the new offsetting model, particularly for US companies, would also have significant implications for utilities and manufacturers with commodity exposures (e.g., food processors) who have significant derivative portfolios and therefore that must be kept in consideration.

The FASB staff clarified they did not necessarily share the same view of the IASB staff on this issue and felt the disclosures should be limited to providing information on the gross balance when amounts are offset in the balance sheet and providing information about conditional arrangements (e.g., master netting agreements) when offsetting is not recognised.

The "user" representative IASB and FASB members had mixed views on the staff proposals. Some felt that the proposals were duplicative and beyond what was needed while others felt the information was necessary and not including it would not be addressing user needs. They also felt that non-financial institutions would have sufficient information to provide the proposed disclosures.

There was discussion about which of the tables should be required as part of the scope of the offsetting project (non-derivative financial assets, derivative assets, derivative liabilities, and credit derivatives and similar instruments). A FASB member mentioned that such an approach was not appropriate as there was certain information within each table that is needed to provide appropriate information on offsetting arrangements. Instead, he recommended that the Boards focus on how to aggregate the information into a single table to provide information on both the gross and net positions. The Boards requested the staff to work under this approach and try to bring back new disclosure proposals later during the week.

Transition requirements

The IASB and FASB tentatively agreed to require retrospective transition where all comparative periods would be presented to reflect the revised netting requirements.

Comment period

Because of the need to finalise the offsetting standard before 30 June 2011, the staff recommended a 90 day comment period on the forthcoming exposure draft. The staff mentioned they are targeting an issuance date of 28 January 2011 for release of the exposure draft.

One FASB Board member expressed significant concern with the 90 day comment period proposal for US constituents as he felt it essentially only provided a 30 day comment period (the month of March) as it would be squeezed between annual reporting due in late February and first quarter close in April for SEC registrants. Given the significant change the proposals would be for US companies, he felt the 90 day comment period was insufficient.

However, both Boards agreed to proceed with a 90 day comment period in order to maintain the 30 June 2011 timeline.

Disclosure requirements (continuation of earlier discussion)

The information below represents a follow-on discussion from that held by the IASB and FASB on Tuesday 14 December 2010. Specifically, the IASB proposed that an entity should provide information about offsetting and related arrangements (such as collateral agreements) and the effect of those arrangements on an entity's exposure to financial contracts. That information should be presented in a single note and in a tabular format, unless another format is more appropriate. The following proposed disclosures were discussed at the meeting:

For each type of financial instrument (financial assets and financial liabilities to be separately disclosed), an entity shall disclose:

The IASB staff provided two different approaches to the above disclosure requirements in the form of appendices for purposes of the discussion.

A member of the IASB had concerns that the wording in the paper and the wording in the appendices was inconsistent and, amongst other things, it was unclear whether the starting point was "fair value" or "fair value less amortised cost". It was confirmed by the staff that the starting point should be the carrying value of the assets and liabilities as indicated on the balance sheet. Another concern of the IASB with the proposed model was that assets/liabilities held at amortised cost and assets/liabilities held at fair value would be combined and provide for less adequate disclosure than envisioned. The IASB staff responded that it was necessary to have some aggregation to prevent the inclusion of an overly complex disclosure requirement. One IASB member questioned the inclusion of cash and non-cash financial collateral into the table.

The Boards discussed this topic and ultimately decided by a majority vote (IASB – 15 yes; FASB – 5 yes) to include cash and non-cash financial collateral in the table. The Boards will move forward with a plan to amend the wording in the appendices and redistribute to the Boards for discussion at a later date.

This concluded the meeting on asset and liability offsetting.
 

IASB publishes exposure draft on offsetting — January 2010

The IASB and FASB have published for public comment joint proposals on the offsetting of financial assets and financial liabilities in the statement of financial position. ED/2011/01 Offsetting Financial Assets and Financial Liabilities proposes to require offsetting when an entity has the right to set-off a financial asset and financial liability and intends to either settle on a net basis or simultaneously.

The proposed requirements would supersede the requirements on offsetting in IAS 32 Financial Instruments: Presentation. Although the proposals are broadly comparable to the requirements contained in IAS 32 currently, they would modify the offsetting criteria in IFRSs by clarifying that the right of set-off should not only be currently enforceable. Additionally, the proposal would enhance the disclosures by requiring improved information about the assets and liabilities subject to set-off and the related arrangements.

The ED has a 90-day comment period with comments due on 28 April 2011.

Click for:

• IASB press release (PDF 53k)
• Access to the Exposure Draft (link to IASB's website)
• IASB Snapshot: Offsetting Financial Assets and Financial Liabilities (PDF 90k)

Discussion at the May 2011 IASB Meeting

Exposure Draft feedback

The IASB staff presented the Boards with a summary of the feedback received from the offsetting exposure draft as well as feedback received during outreach activities performed during the exposure draft comment period, including roundtable sessions held in London, Norwalk and Singapore.

The general feedback received by the Boards was that most respondents strongly supported the Boards' efforts towards conversion feeling that this project was one of, if not the most important to reach a converged solution. In fact, some financial statement users stated that in their view convergence was more important than their preference for either gross or net presentation.

Overall, financial statement users had mixed views with some preferring gross presentation while others supported net presentation in the statement of financial position (this lack of consistency applied across geographical jurisdictions and even to users within the same organisation). However, there was a consensus that both gross and net information was needed for financial statement analysis. Users also preferred that the netting criteria be applied mandatorily rather than as an accounting policy election to improve comparability.

Users also were generally supportive of the disclosure requirements proposed in the exposure draft.

Regulators generally supported the proposals in the exposure draft and the Boards' basis for their decisions. They felt that gross presentation increases market discipline. Regulators were also supportive of convergence. However, the US prudential regulators supported net presentation as they felt the exposure draft proposals would represent the form of the transactions rather than the underlying economics of derivative and repurchase agreements subject to master netting agreements and therefore would provide less relevant information.

Many who currently apply IFRS were supportive of the proposed offsetting criteria. However, financial institutions and their industry groups, regardless of jurisdiction, supported convergence under an approach more similar to current US GAAP as they felt that provided better information regarding an entity's solvency as well as exposure to credit and liquidity risks. Most preparers also requested the Boards reconsider the scope of the proposed disclosure requirements, particularly with respect to loans, receivables and other types of financial instruments (items other than derivatives and repurchase agreements).

The major accounting firms generally supported the Boards' efforts towards convergence and developing a principles based approach towards offsetting. However, they identified what they view as inconsistencies between the proposed criteria, concepts and application guidance which they feel may lead to inappropriate interpretation or inconsistent application. Some firms believe that derivatives should be treated differently to other financial assets and liabilities and believe that net presentation will provide more decision useful information about credit and liquidity risk.

Overall, the feedback provided on specific issues in the exposure draft can be summarised in the following topics:

• Unconditional and legally enforceable right of set-off
• Unconditional vs. conditional rights of set-off
• The definition of 'unconditional and legally enforceable' right of set-off
• Legally enforceable – meaning of enforceable 'in all circumstances'.
• Intention to either (i) settle the financial asset and financial liability on a net basis, or (ii) to realise the financial asset and settle the financial liability simultaneously
• Definition of simultaneous settlement and intent
• The unit of account to which the criteria should be applied
• The treatment of collateral/variation margin
• Whether offsetting should be optional or required.

Project direction going forward

The staff asked the Boards to provide some initial direction based on the feedback received from constituents.

One of the IASB members asked a question on the topic of collateral and the various forms it may take. The staff responded that they intend to hold an education session for the Boards on collateral and variation margin so that the Boards could better understand the issues involved with the various forms of collateral being used in practice.

One of FASB members asked the staff what feedback they have received with regards to regulatory capital implications of the proposals. The staff responded that in conversations held with the accounting task force of the Basel Committee that the proposals should not have a significant impact for those applying Basel II or under the Basel III framework. However, it was noted that the US regulators do use balance sheet totals in the calculation of leverage ratios. One IASB member asked the FASB members whether that was just a jurisdictional issue which the regulators could deal with. However, one FASB member responded that federal law requires that certain regulatory accounting cannot be less stringent than that used for financial reporting purposes.

One of the FASB members mentioned two issues in the exposure draft that had been highlighted for him during the outreach activities related to 1) the simultaneous settlement criteria and the application to transactions cleared through a clearinghouse and 2) the restriction to not allow consideration of collateral in the offsetting criteria. He felt that addressing these two issued may help to resolve a lot of the comments from those who did not support the exposure draft.

Several IASB members expressed their continued support for the proposals in the exposure draft based on the conceptual framework and unwillingness to consider any potential exception for derivatives and repurchase agreements. However, one IASB member mentioned that addressing the issue around simultaneous settlement and permitting netting when using exchanges or clearinghouses may push more transactions to be cleared that way and help to resolve the different views that currently exist but that time for implementation would need to be considered to allow for this migration.

The FASB Chair stated her view that a bank with a master netting agreement in place was in a substantially different economic position to one that did not have a master netting agreement in place and therefore the accounting should reflect that difference. She also questioned why the IASB was comfortable with different thresholds for netting on the balance sheet and income statement. She specifically noted the IASB was unsupportive of balance sheet netting when a contractual arrangement exists through a master netting agreement, however the hedge accounting proposals would essentially permit income statement netting solely based on management's stated risk management objective and the fact that the level of offset achieved was other than accidental (but that no contractual arrangement was required).

One of the IASB members raised the issue of whether a master netting agreement was in fact a single 'contract' (a premise raised by the International Derivatives and Swaps Association during the outreach roundtables) which sparked a conversation on the appropriate unit of account (an individual derivative or a portfolio of derivatives under a master netting agreement).

The IASB Chair attempted to summarise the views of the two Boards to provide some direction for the staff. He acknowledged that there seemed to be support for reconsidering the proposals around simultaneous settlement and collateral arrangements. Some FASB members had requested that derivatives and repurchase agreements be separately considered apart from other financial assets and liabilities to determine whether their characteristics warranted a separate presentation model. The IASB staff mentioned that the reconsideration of collateral would consider various aspects and one of which was the use of a master netting agreement. The Boards will wait to make any determination on whether to separately consider derivatives and repurchase agreements until the discussions around collateral arrangements have occurred.

Discussion at the 31 May - 2 June 2011 IASB Meeting

Education session with representatives of ISDA

The IASB and FASB hosted an educational session where members of the International Swaps and Derivatives Association (ISDA) and members of clearinghouses presented on the topic of collateral and the forms of collateral posting and settlements that occur through various clearinghouses as well as through OTC contracts. No decisions were made as part of the education session.

The educational sessions was followed by a joint meeting where the Boards discussed the unit of account for offsetting and collateral arrangements.

Unit of Account

Constituents have raised questions on the unit of account for applying the offsetting proposals in the exposure draft as the exposure draft did not specify unit of account guidance. The staff noted that this issue was of particular importance for the utility industry. Constituents have raised several ways in which the guidance in the exposure draft could be applied including:

• To a portfolio of financial assets and financial liabilities (when each of the instruments comprise a single cash flow)
• To identifiable cash flows of financial assets and liabilities (a portion of a financial asset and a portion of a financial liability)
• To individual financial asset and financial liabilities (i.e., offsetting a portion of a financial asset against an entire financial liability and vice versa)
• To a portfolio of financial instruments (each comprising of multiple cash flows) with coinciding payment dates
• To a portfolio of financial assets and financial liabilities when the instruments consist of multiple cash flows (without a variation margin system) and non coinciding payment dates
• To a portfolio of financial assets and financial liabilities and the instruments consist of multiple cash flows (with a variation margin system) and non coinciding payment dates
• To a portfolio of derivative financial assets and financial liabilities (under a master netting agreement).

Various Board members had differing views with how the offsetting criteria should be applied, some believing it should be at the financial instrument level with others feeling it should be at the individual cash flows level. However, those who believed that the individual cash flow level acknowledged that there may be operational difficulties in requiring application at this level. The Board made no decisions during this session, the staff acknowledged they would bring detailed papers to discuss the issue of individual cash flows vs. individual instruments and that portfolios would be considered separately.

Collateral

The IASB staff introduced the various types of collateral and how they may or may not be eligible for offsetting under application of the exposure draft should the general prohibition of offsetting collateral be amended. The IASB staff mentioned that both initial margin and contribution to default margin were forms of conditional right settlement (i.e., collateral held to protect against counterparty default) whereas the variation margin may be a form of legal settlement and therefore potentially eligible for the offsetting criteria. The Boards made no decisions during this session; it was simply an introductory session to set the basis for future discussions.

Discussion at the June 2011 IASB Meeting

Alternatives for the offsetting model

The IASB and FASB discussed the overriding model for offsetting based on feedback received from the proposals in the exposure draft.

The Boards considered three possible alternatives for the offsetting model, including two variations of one of the three alternatives:

• Alternative 1would require offsetting financial assets and financial liabilities when a right of set-off exists that is exercisable in both the normal course of business and in bankruptcy, insolvency or default (this alternative is similar to the proposals in the exposure draft)
• Alternative 2 would require offsetting financial assets and financial liabilities when a right of set-off is legally enforceable in the normal course of business (this alternative is similar to existing IAS 32)
• Alternative 3 would require offsetting financial assets and financial liabilities when a right of set-off exists that is only enforceable in bankruptcy, insolvency or default of one of the counterparties to certain derivative transactions executed under a master netting agreement (this alternative is similar to existing US GAAP). A variation of alternative 3 (3A) was also considered that only collateralised derivatives meeting the alternative 3 criteria would be allowed for offsetting.

The staff provided the Boards a summary of various transactions and how they would be presented under the various alternatives.

Both Boards agreed that neither gross nor net presentation in isolation provided financial statement users with sufficient information to understand the risks involved with financial instruments and that adequate disclosure was essential. However, most IASB members and some FASB members were of the feeling that Alternative 1 provided more transparency into the potential exposure than Alternative 3 provided.

Other FASB members felt that Alternative 3 was more appropriate because of the specific nature of derivatives (i.e. individual derivative instruments are already inherently measured on a net basis). They referenced that the existing US GAAP guidance permitting netting under master netting agreement contracts was not a source of concern during the financial crisis. They also stated their belief that if an entity were protected from credit risk of counterparty default, then that should be reflected in the balance sheet and that the argument that net presentation did not provided adequate information about future cash flow was equally relevant for gross presentation.

The IASB voted unanimously in favour of proceeding with an offsetting model under an unconditional right of offset approach (the set-off right exists in both the normal course of business and in bankruptcy, insolvency or default). The FASB voted (4-3) if favour of retaining an offsetting model under a conditional right of offset approach (set-off right exists that is only enforceable in bankruptcy, insolvency or default of one of the counterparties to certain derivative transactions executed under a master netting agreement).

The Boards then briefly discussed possible alternatives of how to resolve the different views. One IASB raised the question of linked presentation which was raised by some comment letter respondents. He noted that during participation in the offsetting roundtables held in Norwalk he had asked preparers, users and regulators if they could live with linked presentation as a form of compromise and each responded that they could. However, neither Board expressed much support for further exploring a linked presentation approach (only 2 IASB members were supportive of further exploration while no FASB members were supportive).

The IASB staff noted that if a resolution cannot be reached, the Boards may have to focus on a disclosure package which permits easy reconciliation between IFRS and US GAAP. The Boards had intended to discuss additional parts of the offsetting model the following day, but based on the Boards landing in different places with the overall approach, those additional discussions were cancelled.

Discussion at July 2011 IASB Meeting

THURSDAY, 21 JULY 2011 (IASB-FASB)

During the 14 June 2011 joint Board meeting, the IASB tentatively agreed on an offsetting approach that requires setoff when an unconditional right exists that is legally enforceable in both the normal course of business and in bankruptcy, insolvency or default and the entity has the intention to settle a financial asset and financial liability net or simultaneously. During that meeting the FASB tentatively agreed on an offsetting approach that provides an exception from the general offsetting criteria for derivative instruments when a right of setoff is only enforceable in bankruptcy, insolvency, or default of one of the counterparties. As the two Boards were unable to agree on the overall approach for offsetting of financial assets and financial liabilities, the Boards decided to focus on disclosure requirements that would allow users to more easily compare credit exposure among US GAAP and IFRS preparers.

Disclosure - Scope

Some preparers who submitted comment letter responses to the offsetting exposure draft had expressed concerns over the scope of the proposed disclosure requirements. In particular, some questioned the usefulness of the disclosures for financial assets and financial liabilities that are not subject to a right of set-off as they felt existing disclosure requirements about credit risk already provide sufficient information. They felt that the proposed requirements would require an entity to re-examine all their contractual arrangements in order to proved the required disclosures.

Based on these comments, the Boards tentatively agreed to retain the original disclosure objective proposed in the exposure draft but to modify the scope of the disclosure requirements to apply only to instruments under an enforceable master netting agreement or similar arrangement and to clarify that an entity would not need to provide the required disclosures if the entity has no financial assets or financial liabilities subject to a right of set-off at the reporting date.

Disclosure - Presentation

The staffs presented the Boards with two alternative presentation approaches for the proposed disclosures:

• Alternative A would be a reconciliation of amounts presented in the statement of financial position to the gross amounts of financial instruments
• Alternative B would require disclosure of:

  (1)	the gross amounts
  (2)	the amounts presented in the statement of financial position
  (3)	any other amounts that can be offset in the event of bankruptcy, insolvency or default of any of the parties (including cash and non-cash financial collateral)
  (4)	the entity's net exposure.

Alternative B would also permit entities a choice of providing the effect of rights of set-off 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) to be presented either by major type of financial instrument and/or by counterparty.

The staffs clarified that many preparers mentioned during outreach activities that they would not track such information by financial instrument type but rather by counterparty. Additionally, the staffs noted that the requirement to separately present collateral would typically be done by counterparty and to allocate to major financial instrument type would require an allocation exercise.

The Boards generally supported the Alternative B approach but the discussion quickly got sidetracked around the topic of the election to permit the disclosures by counterparty. One IASB member mentioned that based on the comments received during the offsetting roundtables he would require the disclosure by counterparty and permit entities to also disclose by financial instrument type if they chose. One of the FASB members questioned what use providing counterparty information in generic terms (e.g. Counterparty A, Counterparty B, etc.) would provide to users and analysts and why the actual counterparty name would not be required. The staff responded that in certain jurisdictions entities may be prohibited from disclosing counterparty information, similarly they may have business confidentially reasons for not being able to disclose. However, analysts may ask the entities directly regarding counterparty exposure based on the information provided in financial statements on an anonymous basis. Another FASB member mentioned he would prefer entities to provide the counterparty information but believed the requirement to provide by individual counterparty may be too granular and result in entities choosing not to provide such information as he felt that individual counterparties would quickly be identified even if generic terms were used. He said he would prefer that some level of aggregation of counterparty exposure were used so entities would be more likely to provide counterparty information.

Ultimately, the Boards tentatively agreed to Alternative B including permitting entities a choice of providing the effect of rights of set-off 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) to be presented either by major type of financial instrument and/or by counterparty.

FRIDAY, 22 JULY 2011 (IASB-only)

As mentioned above, at the 14 June 2011 joint Board meeting, the IASB and FASB supported separate overall approaches for the general criteria of offsetting. Based on this decision the Boards are working on disclosures to minimise the differences when comparing those with financial instruments subject to offset under IFRS and US GAAP. Given that the fundamental purpose of the project was for convergence between IFRS and US GAAP, the IASB discussed whether to proceed with the proposals in the exposure draft or whether to retain the current guidance in IAS 32.

While many argue that the existing offsetting guidance in IAS 32 was 'not broke', the offsetting project did identify several areas of divergence in the application of IAS 32 particularly around the concepts of (1) currently enforceable right of set-off, (2) legally enforceable, (3) simultaneous settlement, (4) unit of account and (5) collateral/variation margin. In particular the staff noted that IAS 32 does not currently provide any guidance regarding the application of collateral in offsetting arrangements and that constituents often look to FIN 41 in US GAAP for application of the simultaneous settlement criterion. The staff mentioned that looking to another source of accounting standards for guidance is an indictment that the standard is not sufficiently clear or detailed. As a result, the IASB staff recommended the Board proceed with the proposals in the offsetting exposure draft while addressing those areas of concern raised by comment letter respondents.

The Board was largely split on whether to proceed with the exposure draft or to simply retain existing IAS 32 and implement new disclosures based on the exposure draft and deliberations with the FASB. Those Board members supporting proceeding with the proposals in the exposure draft felt it incomprehensible to identify significant practice issues through the project and to not resolve them, particularly when the majority of the work has already been completed. One IASB member mentioned that the IASB was unanimous in support of the exposure draft during the last joint meeting while the FASB was split 4-3; he felt this issue would likely re-emerge at some future point but the FASB would be unlikely to move to IAS 32 given the issues that were identified during the project but may find support for the proposals in the exposure draft based on their closeness of their current vote. However, those Board members supporting retaining existing IAS 32 felt the purpose of the project was for convergence and if convergence was not achieved, then issuing a new offsetting standard was change for the sake of change at a time when constituents are already experiencing new standard fatigue.

The IASB Director of Capital Markets mentioned a hybrid approach of the two alternatives where IAS 32 could be retained but then supplemented by additional guidance. She mentioned that issuing a new standard would undoubtedly result in new application issues as constituents dissect and interpret the new guidance. However retaining the IAS 32 offsetting model and supplementing with additional guidance may result in less implementation efforts but resolve some of the practice issues identified during the project. One of the IASB members asked if these issues could also be addressed through the annual improvements process.

The Board tentatively agreed (8 votes to 7 votes) not to proceed with the proposals in the exposure draft and instead retain the guidance in IAS 32. However, the Board instructed the staff to identify potential ways that IAS 32 could be clarified and supplemented by additional guidance to resolve some of the issues identified during the offsetting project.

Discussion at Special 28 July 2011 IASB Meeting

The staff told the Board that based on the decisions made during the July 2011 joint Board meeting regarding converged offsetting disclosures. The staff asked the Board for decisions on effective date and transition requirements noting the FASB would also be discussing these issues at one of their future meetings. The staff recommended the Board require retrospective application of the disclosure requirements with an effective date of annual and interim reporting periods beginning on or after 1 January 2013. The Board only had seven members present for this session so did not take an official vote, but all members in attendance expressed general support for the staff recommendations.

Discussion at September 2011 IASB Meeting

Clarifying amendments to IAS 32

At the July 2011 IASB-only meeting, the Board decided not to proceed with finalising the proposals in the offsetting exposure draft and retain the existing offsetting guidance in IAS 32. However, the Board asked the staff to explore ways to address the areas of diversity in practice identified during the offsetting project. Those areas of diversity primarily focused around:

1)	the meaning of 'currently has a legally enforceable right of set-off'
2)	the application of the simultaneous settlement criterion
3)	the treatment of collateral and margin
4)	issues around unit of account.

Meaning of 'currently has a legally enforceable right of set-off'

IAS 32 does not provide specific guidance as to the meaning of currently having a legally enforceable right of set-off. The offsetting exposure draft instead proposed that an entity have an unconditional and legally enforceable right to set off in order to qualify for offsetting. The exposure draft states that an unconditional right of set-off is one in which the exercisability is not contingent on the occurrence of a future event while a legally enforceable right of set-off is enforceable in all circumstances (both in normal course of business and on default, insolvency or bankruptcy of one of the counterparties).

The staff asserted during the meeting that the exposure draft proposals were not intended to change practice for IFRS preparers but highlighted inconsistencies in the interpretation of the word 'currently' in IAS 32. The staff believe that while IAS 32 does not specifically refer to an 'unconditional right', if a right of set-off were contingent or conditional on a future event then an entity would not currently have a legally enforceable right.

The exposure draft also specified that the right of set-off should be in all circumstances. However, current practice has often interpreted the term 'currently' to mean a right exercisable under current conditions (or in the normal course of business). The staff highlighted that the IAS 32 criterion does not refer to a currently enforceable right but rather to rights the entity currently has. To avoid inconsistent application, the staff believes the Board should clarify in IAS 32 that the right of set-off must be legally enforceable both in the normal course of business and in the event of default, bankruptcy and insolvency.

The exposure draft also stated that the right of set-off be enforceable on default, insolvency or bankruptcy of one of the counterparties. Some felt that this changed IAS 32 because they felt only the default, insolvency or bankruptcy of the counterparty should be considered rather than the reporting entity itself as doing so is inconsistent with a going concern basis of the financial statements. However, the staff believe that such an argument is would be inconsistent with the principles and objectives in both the exposure draft and IAS 32.

One of the IASB members had concerns with the staff view that the right of set-off be enforceable in all circumstances by one of the counterparties as they felt that a going concern basis is used in other areas of accounting and therefore this approach would be inconsistent. Another of the IASB members had issues with the staff not recommending any changes to the 'currently' guidance in IAS 32 and would prefer incorporation of the term 'unconditional' as used in the exposure draft.

The Board tentatively decided to not to add further clarification or application guidance with respect to the use of the word 'currently' in 'currently has a legally enforceable right of set-off'. However, the Board will include application guidance to confirm that a right of set-off should be legally enforceable both in the normal course of business and in the event of default, bankruptcy and insolvency of one of the counterparties.

Simultaneous settlement

IAS 32 requires that an entity must intend to settle on a net basis or realise the asset and settle the liability simultaneously in order to set-off financial assets and financial liabilities. The exposure draft also utilised the term simultaneous settlement and defined the term as when 'settlements take place at the same moment (ie there is exposure to only the net or reduced amount). Many respondents to the exposure draft asserted that simultaneous settlement is currently interpreted in various manners but a requirement of 'at the same moment' would be inconsistent with settlement practices. For example, many have taken a view under IAS 32 that settlement through a clearinghouse would always meet the simultaneous settlement criterion. Others have analogised to ASC Topic 210-20-45-11 under US GAAP related to offsetting of repurchase and reverse repurchase agreements.

Based on the feedback received by constituents and the acknowledged diversity in current practice under IAS 32, the Board tentatively decided to clarify the definition of net settlement in the application guidance of IAS 32 to include gross settlement mechanisms with features that eliminate or result in insignificant credit and liquidity risk and under which processing of receivables and payables occur in a single settlement process. The staff will likely include guidance on distinguishing factors for such gross settlement mechanisms including:

• financial assets and financial liabilities that meet the right of offset criterion are submitted for processing at exactly the same point
• once submitted for processing, the transactions cannot be cancelled or altered
• there is no potential for the cash flows arising from the assets and liabilities to change once they have been submitted for processing unless the processing fails
• if the processing of one asset or liability that is offset against another fails, then the processing of the related security used as collateral also fails
• processing is carried out through the same settlement depositary
• there is a high likelihood that an intraday credit facility is available and would be honoured until the settlement process is complete.

Treatment of collateral and margin

IAS 32 currently allows collateral that meets the offsetting criteria to be offset against recognised financial assets or financial liabilities. However, the exposure draft proposed prohibiting offsetting assets pledged as collateral or the obligation to return collateral obtained against the associated financial assets and financial liabilities. Many respondents raised issue with the treatment of collateral and margin as they felt the proposed guidance was more restrictive than current IAS 32. Some clearinghouses require counterparties to provide or receive variation margin on a daily basis based on fair value changes for the effect of discounting and settlement of contracts based on the net position of certain asset classes or product types; these payments often meet the IAS 32 offsetting criteria today. The staff further analysed this issue and noted no existing practice issues or concerns around netting of collateral under IAS 32. One Board member inquired about collateral that could be clawed back, but another Board member reiterated that such an arrangement would not qualify for offsetting currently under IAS 32. The Board tentatively decided to not include the additional guidance from the exposure draft in IAS 32 around collateral arrangements such that existing practice would continue unchanged.

Unit of account

Current IAS 32 and the proposals in the exposure draft did not specify the appropriate unit of account for applying offsetting (e.g. the individual financial instrument level or specific cash flow level). Many respondents to the exposure draft requested clarification on the unit of account for offsetting. The feedback identified existing diversity in practice with regards to application of the unit of account for offsetting. Energy companies often apply the offsetting criteria to identifiable cash flows while financial institutions often apply the offsetting criteria to the entire financial assets and financial liabilities as the volume of transactions would make applying to individual cash flows impractical and burdensome. The IASB staff agree that applying offsetting to individual cash flows may conceptually be preferable, but they had concern over how to operationalise such a requirement for large financial institutions. One alternative would be to develop a practical expedient to scope out certain entities where offsetting individual cash flows may be impractical, but defining the correct set to scope out could also prove difficult. As a result, the staff recommended the Board not provide additional guidance regarding unit of account and permit the current diversity in practice to continue. The Board tentatively decided not to add additional guidance regarding unit of account to IAS 32.

Effective date and transition

Consistent with the proposals for the offsetting disclosure requirements, the staff recommended the amendments to IAS 32 to provide additional application guidance also be retrospectively applied with an effective date of annual periods beginning on or after 1 January 2013. One of the Board members questioned the staff's assertion that the amendments were not changing IAS 32 and if so then why retrospective application was necessary. Another Board member clarified that there would be no use of hindsight in applying the clarifying amendments retrospectively. The Board tentatively decided to require retrospective application and an effective date for annual and interim reporting periods beginning on or after 1 January 2013 for the clarifying amendments to IAS 32.

The staff received permission from the Board to proceed with drafting the amendments to IAS 32. Two Board members mentioned they are likely to dissent to the amendments.

Offsetting disclosures – Effective date and transition

During the July IASB-only meeting, the staff had presented the Board with proposed effective date and transition requirements for the offsetting disclosures. The staff recommended retrospective application of the disclosure requirements and an effective date of annual and interim reporting periods beginning on or after 1 January 2013.

The Board expressed general support of the proposals but did not take an official vote because of the limited participation during that meeting. Since that meeting, the FASB has tentatively agreed on the same staff proposals. During this meeting, the IASB tentatively decided to require retrospective application of the disclosures with an effective date of annual and interim reporting periods beginning on or after 1 January 2013.

The staff received permission from the Board to begin drafting. No Board members expressed that they planned to dissent to the disclosure amendments.

Location of offsetting guidance

IAS 32 currently includes the guidance regarding offsetting financial assets and financial liabilities. However, some comment letter respondents to the exposure draft suggested the offsetting requirements be included in IFRS 9 so that all guidance for financial instruments are contained within a single standard. However, the staff feel that IFRS 9 is a replacement of IAS 39 and that presentation is a separate issue and should continue to be included in IAS 32. Additionally, the joint disclosure requirements on offsetting developed with the FASB would be included in IFRS 7 with the other disclosure for financial instruments rather than IFRS 9.

One Board member expressed his support for the disclosure requirements to be a part of IFRS 7 but a preference for the offsetting guidance to be part of IFRS 9 rather than IAS 32. He suggested the IFRS 9 already contains presentation guidance with regards to changes in fair value being recognised in earnings or other comprehensive income. For endorsement purposes, he believed a single standard would be preferable. However, the staff responded that doing so would push the effective date back, likely until 2015, and the staff felt that the diversity in practice issues identified should be resolved more timely.

The Board tentatively decided that the offsetting criteria and amendments to the offsetting application guidance be contained within IAS 32 and that the proposed offsetting disclosure requirements be contained within IFRS 7.

The Board also discussed whether any consequential amendments were necessary to other IFRSs. The staff identified two other standards that have linkages to the offsetting criteria in IAS 32: IAS 12 Income Taxes and IAS 19 Employee Benefits. However, the staff note that neither IAS 12 nor IAS 19 contains the term 'currently' and therefore the additional application guidance would not impact those standards. The Board tentatively decided that no conforming amendments to other IFRSs were required based on the additional application guidance made to IAS 32.

The Board then considered whether their due process requirements had been met. The Board agreed that appropriate due process had occurred and that re-exposure was not required. However, one IASB member felt the additional application guidance to IAS 32 should be re-exposed.

Discussion at the November 2011 IASB Meeting

Reconsideration of Effective Dates

The IASB had previously tentatively decided that both the clarifying amendments to IAS 32 and the new disclosures requirements on offsetting of financial instruments should be effective for annual periods beginning on or after 1 January 2013.

The staff has subsequently received concerns by preparers regarding the effective date of both the disclosure requirements and the clarifying amendments to IAS 32.

With respect to the new disclosure requirements, some IFRS constituents believe that an effective date of 1 January 2013 with retrospective application would be overly burdensome given the likely issuance date of late 2011. They cited the fact that when the offsetting criteria in IAS 32 are not met, those entities may not have such information readily available in their financial reporting systems. They also noted that information on collateral is typically kept within credit systems rather than the financial reporting system.

However, the Board had little sympathy in providing and relief regard effective date voting 14-1 in favour of retaining an effective date of 1 January 2013 with retrospective application for the new disclosure requirements.

Constituents have also raised concerns on the clarifying amendments to IAS 32 and the 1 January 2013 effective date with retrospective application required. They assert they will have to go back and obtain additional evidence to applying offsetting. Additionally, some believe that the clarification may have a material impact on the statement of financial position as they may not be able to obtain appropriate evidence for prior years and therefore would need to unwind amounts that have previously been offset, which could result in additional reporting requirements such as presentation of as many as five years' of comparative data. They have also raised the issue of systems modifications that will be required in order to comply with the clarifying amendments.

The Board had mixed views with respect to providing additional implementation time for the clarifying amendments to IAS 32. Some supported the staff recommendation to delay the effective date for the clarifying amendments to 1 January 2015 in order to synchronise with the implementation of IFRS 9. One Board member cited his recommendation during the September 2011 board meeting that these amendments should be subject to re-exposure because of the potentially significant change they may have for some constituents. Another Board member expressed his support saying that the feedback he had received was that certain constituents would require systems modifications. However, other Board members were strongly opposed to delaying the effective date until 2015 citing that this project was resulting from the financial crisis and that implementation should not be delayed. Some of them preferred an effective date of 2013 but not requiring retrospective application if that would alleviate the constituent concerns. However, the staff said they viewed have comparative periods restated as essential for comparability purposes. One Board member suggested an alternative effective date of 1 January 2014 which received some amount of support.

The Board first voted on the staff recommendation to delay the effective date until annual periods beginning on or after 1 January 2015 but did not support the recommendation. The Board then considered whether it could support an effective date of 1 January 2014 and the Board tentatively agreed on such an approach with 9 Board members supporting this recommendation.

16 December 2011: IASB amends offsetting rules in IAS 32 and amends disclosure requirements

On 16 December 2011, the IASB issued amendments to IAS 32 Financial Instruments: Presentation that provide clarifications on the application of the offsetting rules. This joint project between the IASB and FASB was intended to address the differences in their respective accounting standards regarding offsetting of financial instruments. However, the FASB decided to retain the current US GAAP guidance. Therefore, the Boards decided to jointly focus on developing converged disclosure requirements to allow financial statement users the ability to more easily compare financial instruments exposures under IFRS and US GAAP. Additionally, the IASB decided to amend IAS 32 to clarify certain aspects because of diversity in application that was identified during the IASB constituent outreach.

The project to amend IAS 32 focused on four main areas:

• the meaning of 'currently has a legally enforceable right of set-off'
• the application of simultaneous realisation and settlement
• the offsetting of collateral amounts
• the unit of account for applying the offsetting requirements.

The amendments to the disclosure requirements in IFRS 7 Financial Instruments: Disclosure require information about all recognised financial instruments that are set off in accordance with paragraph 42 of IAS 32. The amendments also require disclosure of information about recognised financial instruments subject to enforceable master netting arrangements and similar agreements even if they are not set off under IAS 32. The IASB believes that these disclosures will allow financial statement users to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with an entity's recognised financial assets and recognised financial liabilities, on the entity's financial position.

The amendments to IAS 32 are not effective until annual periods beginning on or after 1 January 2014. However, the new offsetting disclosure requirements are effective sooner - for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods. The amendments need to be provided retrospectively to all comparative periods.

Click for IASB press release (link to IASB website).