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Financial instruments – Asset and liability offsetting

Date recorded:

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 Financial Instruments: Presentation.

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.

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