FASB and IASB Tentatively Agree on Offsetting Disclosure Requirements While the IASB Decides to Retain the IAS 32 Offsetting Model

Published on: 25 Jul 2011

At their joint meeting last week, the FASB and IASB (the “boards”) reached tentative decisions on the scope and disclosure requirements for their joint project on the offsetting of financial assets and financial liabilities. In addition, at their meeting last Friday, the IASB tentatively decided to retain the offsetting criteria in IAS 321 (subject to the modified disclosure requirements being discussed with the FASB), which represents a change from its previous decision on June 14 to continue developing the model proposed in its exposure draft (ED).2

FASB’s and IASB’s Tentative Decisions

Scope of Disclosure Requirements for the Offsetting of Financial Assets and Liabilities

The boards tentatively decided to (reprinted from the FASB July 20–21 action alert):

  1. Retain the objective for the offsetting disclosures, namely, that an entity should disclose information about rights of setoff and related arrangements (such as collateral arrangements) associated with the entity’s financial assets and financial liabilities to enable users of its financial statements to understand the effect of those rights and arrangements on the entity’s financial position
  2. Modify the scope of the disclosure requirements such that they apply only to instruments under an enforceable master netting agreement or similar arrangement (for example, derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities lending arrangements)
  3. Clarify that an entity need not provide the required disclosures if the entity has no qualifying assets or liabilities that are subject to a right of setoff (other than collateral agreements) at the reporting date.

Disclosure Requirements

The boards also tentatively decided to require entities to disclose the following information (reprinted from the FASB action alert):

  1. The gross amounts of financial assets and financial liabilities
  2. The amounts of financial assets and financial liabilities offset in the statement of financial position
  3. The net amount after taking in account (1) and (2) (which should be the same as the amounts reported in the statement of financial position)
  4. The effect of rights of setoff that are only enforceable and exercisable in bankruptcy, default, or insolvency of either party not taken into account in arriving at the amounts presented in the statement of financial position (including collateral)
  5. The net exposure after taking into account the effect of items (2) and (4).

The boards’ tentative decision would permit an entity to disclose the information in (4) above by major type of financial instrument, counterparty, or both.

IASB Tentative Decision

At their June 14, 2011, joint meeting, the boards discussed alternative approaches to converging the requirements for offsetting financial instruments in the statement of financial position. The IASB voted to retain the approach proposed in its January 2011 ED. Under this approach, an entity is required to present recognized financial instruments net in the statement of financial position when the entity (1) has an unconditional and legally enforceable right to set off a financial asset and liability that is exercisable both in the normal course of business and in bankruptcy, insolvency, or default, and (2) intends either to settle on a net basis or realize the asset and liability simultaneously. The FASB voted in favor of an alternative approach based on conditional rights of offset for some financial instruments, which is similar to the current requirements under U.S. GAAP.

As a result of these differing decisions, the boards decided to focus on converging disclosure requirements that would address differences between the boards’ approaches (see the discussion above). However, because the project is not expected to result in a converged accounting model, the IASB discussed last Friday whether it should continue to develop the model proposed in the ED or retain the existing offsetting requirements in IAS 32. The IASB voted 8 to 7 not to continue developing the model proposed in the ED; however, it instructed its staff to identify potential ways that IAS 32 could be clarified or supplemented with additional application guidance to address some of the practice issues identified during the course of the project.

[1] IAS 32, Financial Instruments: Presentation.

[2] IASB Exposure Draft, Offsetting Financial Assets and Financial Liabilities.

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