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Asset and liability offsetting

Date recorded:

The Boards considered the conditions necessary for offsetting financial assets and liabilities. The Boards discussed six potential conditions that could be considered as conditions for offsetting and their interaction. These conditions included:

  1. whether the parties need to have the ability to offset or settle net
  2. whether the parties need to demonstrate an intent to settle net
  3. whether the amounts owed under the respective contracts ought to be settled on the same date or be settled simultaneously
  4. whether the financial asset and liability ought to have the same maturity
  5. whether the financial asset and liability ought to have the same underlying risk; and
  6. whether offsetting should be on the basis of bilateral or multilateral netting arrangements.

After a discussion that covered the practice of netting as well as perceived purpose of the statement of financial position (shall it portray liquidity, credit risk, risks in general etc.), the Boards concluded that in most cases both net and gross figures are useful and thus both need to be disclosed (either on the face or in the notes).

Several Board members noted that the right of offset must be substantive and this assessment might be complicated by enforcement of offsetting in different jurisdictions.

The Boards agreed that when the parties have the substantive unconditional right (ability) of offset and they have the intent to net settle offsetting should be required. In this case no other conditions would be required.

The Boards also discussed situations when parties have the unconditional right (ability) of offset and enter into transaction simultaneously. The Boards discussed what does simultaneously mean (at the same moment vs. the same date). The Boards considered the exposure to counterparty, credit and liquidity risk in this situation but did not reach any conclusion. The Boards asked the staff to further analyse the issue and will revisit the issue at their November meeting.

The Boards continued their discussion with the netting when parties have the conditional right (ability) of offset (conditional on bankruptcy). Several Board members noted that other conditions would need to be fulfilled in this situation (i.e. the same day, the same maturity and the same underlying risk). Other Board members disagreed. They noted that offset is applicable only on bankruptcy and considering this conditionality is inconsistent with the principle of going concern. In addition, they noted that the counterparties would exchange gross cash flows payments in the meantime.

The Boards asked the staff to further analyse the issue and will revisit the issue at their November meeting.

The Boards asked the staff to prepare three options for the November meeting covering netting in the three situations covered. Some Board members expressed their concerns that the emerging consensus seems to be to allow netting in fewer situations than is the current practice under both IFRSs and US GAAP and limit it virtually to payment netting. The Boards will discuss these issues at their November joint meeting.

Correction list for hyphenation

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