Asset and liability offsetting
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:
the gross amounts
the amounts presented in the statement of financial position
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)
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.