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Asset and Liability Offsetting

Date recorded:

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.