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Journal entry — FASB and IASB deliberate offsetting of financial assets and financial liabilities

Published on: Jun 14, 2011

The IASB and FASB (the “boards”) met today to discuss ways to progress in their joint project on the offsetting of financial assets and financial liabilities. The boards’ staffs presented four potential approaches for consideration:

  • Alternative 1 — Retain the approach proposed in their exposure draft (ED) and address issues raised by constituents related to (1) unit of account, (2) treatment of collateral/margin, and (3) the simultaneous settlement criterion.
  • Alternative 2 — Retain the existing offsetting criteria in IAS 321 (i.e., “an approach that requires offsetting if an entity has a currently enforceable legal right to set off the recognised amounts (and intends either to settle net or settle simultaneously)”).
  • Alternative 3 — Adopt an approach based on conditional rights of offset for all or some financial instruments (i.e., similar to the current requirements under U.S. GAAP).
  • Alternative 3(a) — Adopt an approach similar to alternative 3; however, offsetting would be limited to collateralized derivatives that satisfy certain additional criteria.

The IASB voted unanimously (15 votes) in favor of alternative 1, which would retain the requirements proposed in the ED, and proposed to address issues raised by constituents related to the application of the proposed approach during future meetings.

The FASB voted 4 to 3 in favor of alterative 3 (i.e., to retain the offsetting requirements in U.S. GAAP).

Given the boards’ different approaches, the IASB chairman noted that an alternative to pursuing a converged solution may be to (1) use disclosures to address differences between the boards’ approaches; (2) use a linked presentation approach, which would retain the requirements in the ED but separately show conditional offsetting for derivatives on the face of the balance sheet (a model would need to be subsequently developed by the staff); or (3) adopt alternative 3(a), including developing additional disclosures. Only two IASB members, and no FASB members, voted in favor of pursuing a linked presentation approach, while four IASB members and one FASB member voted in favor of alternative 3(a). As a result, the boards may try to use disclosures to address differences in their models.


[1] IAS 32, Financial Instruments: Presentation.

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