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Heads Up — FASB proposes scope clarification of offsetting disclosures

Published on: Nov 29, 2012

Download PDFNovember 29, 2012
Volume 19, Issue 30

by Mark Bolton and Heidi Suzuki, Deloitte & Touche LLP

On November 26, 2012, the FASB issued a proposed ASU1 that would clarify which instruments and transactions are subject to the disclosure requirements under ASU 2011-112 for financial assets and liabilities that are offset in the statement of financial position or subject to master netting arrangements or similar agreements. The proposal is intended to address preparer concerns that the scope of the disclosure requirements under ASU 2011-11 is overly broad and that the related compliance costs would exceed any benefits ultimately realized by financial statement users. Like the requirements under ASU 2011-11, the proposed requirements would be effective for fiscal years beginning on or after January 1, 2013, and interim periods therein. Retrospective application would be required for any period presented that begins before the entity’s initial application of the new requirements. Comments on the proposal are due by December 21, 2012.

Background

The offsetting project began as a joint effort by the FASB and the IASB to eliminate the significant presentation differences created by their respective offsetting models under U.S. GAAP and IFRSs. Because the boards could not agree on a single, converged offsetting presentation model, they ultimately decided at the end of last year to retain their existing offsetting models and to develop converged requirements under which entities would disclose information about their gross and net exposures.3 Those requirements apply to all financial and derivative instruments that are offset in the statement of financial position in accordance with ASC 210-20-45 or ASC 815-10-454 or that are subject to an enforceable master netting arrangement or similar agreement. For further information, see Deloitte’s December 20, 2011, Heads Up on ASU 2011-11.

In planning to implement the new requirements, some preparers became concerned that the scope of the standard was broader than they had originally assumed. In particular, they noted that many of their trade receivable and trade payable agreements contained standard commercial provisions allowing either party to offset in the event of default. They believed that such provisions were similar to an enforceable master netting arrangement and that those receivables and payables would therefore be subject to the new disclosure requirements. Broker-dealer preparers also questioned whether the receivables and payables resulting from their unsettled regular-way trades were subject to agreements similar to master netting arrangements and thus within the scope of the guidance. These preparers asked the FASB to reconsider whether the benefits of including such instruments in the offsetting disclosures justified the costs that preparers would incur to perform a comprehensive review of all of their agreements to determine whether the agreements contained netting provisions similar to a master netting arrangement.

Key Proposed Changes

To respond to these concerns, the FASB proposes to limit the scope of the offsetting disclosures to the following instruments or transactions:

  • “Recognized derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset in accordance with either [ASC] 210-20-45 or [ASC] 815-10-45.”
  • “Recognized derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either [ASC] 210-20-45 or [ASC] 815-10-45.”

Under the proposal, an entity is also permitted to include in the tabular offsetting disclosures all other recognized derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to facilitate reconciliation to line items in the statement of financial position.

The proposal would not change the format or content of the offsetting disclosures. See Deloitte’s December 20, 2011, Heads Up for a detailed discussion of those disclosure requirements and for illustrative disclosures.

Editor’s Note: In explaining its rationale for narrowing the scope from all financial instruments and derivatives to those specified in the proposal, the Board noted that (1) constituent concerns about presentation differences between U.S. GAAP and IFRSs focused predominantly on derivatives, repurchase and reverse repurchase agreements, and securities lending and borrowing arrangements and (2) it does not believe that, in practice, there are significant U.S. GAAP–IFRS presentation differences for trade receivables and payables or unsettled regular-way trades.

In its proposal, the FASB asks respondents to indicate whether there are other instruments that should be included in the scope of the guidance “that would provide useful information to users of financial statements as it relates to reconciling differences as a result of offsetting between financial statements prepared in accordance with U.S. GAAP and those financial statements prepared in accordance with IFRS[s].”

Impact on Convergence With IFRSs

Concurrently with the FASB’s issuance in 2011 of ASU 2011-11, the IASB issued amendments to IFRS 7 with a comparable effective date and essentially the same disclosure requirements as those under ASU 2011-11. Accordingly, if the FASB’s proposal is finalized, fewer financial instruments would be subject to the offsetting disclosure requirements under U.S. GAAP than under IFRSs.

At a recent IASB meeting, the IASB staff updated the IASB on the FASB’s decisions regarding the scope of the offsetting disclosures and indicated that it did not recommend that the IASB consider changing the scope of the disclosures under IFRSs. The session was informational, and the IASB was not asked to make any decisions. It is uncertain whether the IASB will revisit this issue in the future.

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1 FASB Proposed Accounting Standards Update, Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities.

2 FASB Accounting Standards Update No. 2011-11, Disclosures About Offsetting Assets and Liabilities (subsequently codified in FASB Accounting Standards Codification Subtopic 210-20, Balance Sheet: Offsetting).

3 The joint project culminated in the FASB’s issuance of ASU 2011-11 and the IASB’s corresponding amendments to IFRS 7, Financial Instruments: Disclosures, and IAS 32, Financial Instruments: Presentation.

4 FASB Accounting Standards Codification Subtopic 815-10, Derivatives and Hedging: Overall.

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