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Asset and liability offsetting

Date recorded:

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.