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Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7 and IAS 32) [Completed]

Effective dates: IFRS 7 (amendments) Annual reporting periods beginning on or after January 1, 2013; IAS 32 (amendments) Annual reporting periods beginning on or after January 1, 2014.

Transitional provisions:

The IFRS 7 amendments are effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The required disclosures should be provided retrospectively, and require full retrospective application.

The IAS 32 amendments are effective for annual periods beginning on or after January 1, 2014 and are required to be applied retrospectively.

Last updated:

December 2011

Overview

This project has now been completed.  On December 16, 2011 the IASB and FASB issued common disclosure requirements that are intended to help investors and other users to better assess the effect or potential effect of offsetting arrangements on a company's financial position. The new requirements are set out in Disclosures-Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7).

As part of that project the IASB also clarified certain aspects of IAS 32, Financial Instruments: Presentation. The amendments address inconsistencies in current practice when applying the requirements.

Amended disclosures

The amendments to IFRS 7 require an entity to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable mater netting agreement or similar arrangement.

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

The amendments clarify that to result in offset of a financial asset and a financial liability, a right to set-off must be available today rather than being contingent on a future event and must be exercisable by any of the counterparties, both in the normal course of business and in the event of default, insolvency or bankruptcy. Also, the amendments clarify that the determination of whether the right meets the legally enforceable criterion will depend on both the contractual terms entered into between the counterparties as well as the law governing the contract and the bankruptcy process in the event of bankruptcy or insolvency.

Meaning of "simultaneous realization and settlement"

The amendments provide clarification on which settlement processes would meet the requirement for offsetting that an entity has "the intention to settle a financial asset and a financial liability net or simultaneously". The realization of financial asset and settlement of a financial liability is simultaneous if the settlement occur "at the same moment". However gross settlement that does not occur simultaneously may also meet the principle and criteria of offsetting if a single settlement process results in cash flows being equivalent to a single net amount.

Key Features

Offsetting, otherwise known as netting, takes place when entities present their rights and obligations to each other as a net amount in their statements of financial position.

In January 2011 the IASB and the FASB published an ED, Offsetting Financial Assets and Financial LiabilitiesThis was in response to requests from stakeholders and recommendations from the Financial Stability Board and the Basel Committee on Banking Supervision to achieve convergence of the Boards’ requirements for offsetting financial assets and financial liabilities.

The offsetting model in IAS 32, Financial Instruments: Presentation, requires an entity to offset a financial asset and financial liability when, and only when, an entity currently has a legally enforceable right of set-off and intends either to settle on a net basis or to realise the financial asset and settle the financial liability simultaneously.

The US GAAP offsetting model, while similar to the model in IFRSs, in addition provides a broad exception to the above principle which permits entities to present derivative assets and derivative liabilities subject to master netting arrangements on a net basis in the statement of financial position even if an entity does not have a current right or intention to settle net.

These different requirements result in a significant difference between amounts presented in statements of financial position prepared in accordance with IFRSs and amounts presented in statements of financial position prepared in accordance with US GAAP, particularly for entities that have large amounts of derivative activities. The proposals in the ED would have replaced the current requirements for offsetting financial assets and financial liabilities under IFRS 7 and would have established a new common approach with the FASB.  Instead, the Boards have decided to retain their different offsetting models but have issued common disclosure requirements that help investors and other users to better assess the effect or potential effect of offsetting arrangements on a company's financial position.

The amendments to IAS 32 address inconsistencies in current practice when applying the offsetting criteria in IAS 32, Financial Instruments: Presentation. The amendments clarify:

  • the meaning of ‘currently has a legally enforceable right of set-off’; and

  • that some gross settlement systems may be considered equivalent to net settlement.

Recent activities

December 2011

At its meeting on December 13-15, 2011, the IASB approved amendments to IFRS 7, Financial Instruments: Disclosures, with respect to offsetting financial assets and financial liabilities. The IASB also approved amendments to clarify certain aspects of IAS 32, Financial Instruments: Presentation.

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