The International Accounting Standards Board (IASB) and US-based Financial Accounting Standards Board (FASB) have published a proposal to establish a common solution to offsetting financial assets and financial liabilities on the balance sheet.
The boards are keen to eliminate this conflict that involves different rules about when financial assets and financial liabilities may be presented, depending on whether the entity reports using IFRS or US GAAP.
The Offsetting Financial Assets and Financial Liabilities exposure draft is an attempt to address this and is in response to concerns expressed by users and preparers of financial statements. The problem has also been raised by the G20 and the Financial Stability Board.
The issue is particularly prevalent in the presentation of derivative assets and derivative liabilities by financial institutions.
The boards are proposing that offsetting should apply only when the right of set-off is enforceable at all times, including in default and bankruptcy, and the ability to exercise this right is unconditional, that is, it does not depend on a future event.
The entities involved must intend to settle the amounts due with a single payment or simultaneously.
Offsetting - also known as netting - takes place when entities present their rights and obligations to each other as a net amount in their statement of financial position.
The exposure draft is open for public comment until 28 April and can be accessed via the IASB and FASB websites.
Sir David Tweedie, chairman of the IASB, said: “The fact that companies can, in some instances, report IFRS balance sheet figures that are double the size of their US GAAP numbers is not acceptable in global capital markets.”
Leslie Seidman, chairman of the FASB, added: “This proposal would eliminate a major difference in reporting relating to financial instruments under US GAAP and IFRSs.
“Investors expressed a desire for information about both the gross amounts of financial assets and liabilities and the net amounts, if credit risk has been mitigated. This proposal would change US GAAP to require netting in a narrower set of circumstances, but the effect of other forms of credit mitigation would be disclosed in the footnotes.”
Andrew Vials, the leader of KPMG’s global IFRS Financial Instruments team, said: “It is good to see the IASB and the FASB working closely together. We welcome the prospect of convergence in this area - although there is a debate to be had about whether the proposals offer the best possible converged solution.
"Financial institutions will need to get to grips with how the proposals might affect the treatment of complex settlement and margining arrangements with financial market counterparties and clearing houses and any possible interaction with regulatory capital requirements.”
Further reading
- Summary of the proposals (IASB Snapshot)
- FASB in Focus document on the FASB website
- Offsetting Financial Assets and Financial Liabilities - Exposure Draft