Asset and liability offsetting

Date recorded:

The staff presented to both the IASB and FASB the results of outreach activities performed in July and August 2010 related to offsetting of financial assets and liabilities. Those outreach activities included meetings with analysts from asset management firms, investment banks, and rating agencies as well as an online user survey. The FASB staff also met with the FASB's Investors Technical Advisory Committee while the IASB staff met with members of the Corporate Reporting Users' Forum.

The summary of the feedback provided to the Boards was that there was no general consensus in the views of users. Credit analysts would prefer to see both the net (on balance sheet) and gross (in footnote disclosure) exposure for derivatives; however, equity analysts would prefer having the gross exposures on the face of the balance sheet. The areas where there was some amount of consistency in user preferences include achieving convergence, needing both the gross and net presentation (between the balance sheet and the footnotes), if net presentation is allowed - making it a requirement rather than an election, requiring specific disclosures, and differentiating between derivatives and loans and deposits.

The staff had differing views on whether offsetting provided decision useful information and was appropriate under the conceptual framework. Some staff felt that offsetting was not in line with the conceptual framework while others believe offsetting is a result of credit mitigation strategies and that net presentation provides more useful information and is appropriate in the circumstances.

The staff asked the Board for their views on how to proceed given the divergent views of the staff and the lack of consensus from users. Various views were discussed by the Board on when and if offsetting would be appropriate. Some focused on the current differences between IFRS and U.S. GAAP (that being the FASB's exception of the intention to net settle consideration when a Master Netting Agreement is utilised).

An IASB Board member introduced new concepts for an offsetting model which received support from some other IASB Board members. The proposed concept included ignoring the current intent and ability to net settle but instead requiring that the contracts be settled on the same day, with the same counterparty and be subject to the same risk (e.g., interest rate risk). Others supported these concepts but felt that intent and ability must also be a consideration.

One of the FASB Board members mentioned that the two Boards were currently converged in their general principal to net presentation. Where they differed was in the FASB's exception to the principal when a Master Netting Agreement was in place. The Board member asked for clarification on whether the two Boards were trying to resolve their current differences (e.g., the exception to the principle) or developing an entirely new principle behind net presentation as they were willing to revisit the current exceptions but had concern with revisiting the current principle.

Another FASB Board member questioned the concept of the same risk being required to achieve offsetting. He used the example of a cross currency interest rate swap that was subject to two risks (interest rate risk and foreign exchange risk) and asked whether it would ever be permitted for offsetting.

The Boards ultimately agreed that having the ability to net settle and the contracts being with the same counterparty were fundamental to achieving offsetting. Areas remaining for discussion at future Board meetings include:

  • whether intention to net settle should be required
  • whether the contracts require settlement simultaneously (e.g., the same day)
  • whether the contracts are exposed to the same risk, and
  • when net settlement only occurs upon insolvency or default, whether that would allow for offsetting.


Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.