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FASB Proposes to Clarify Balance Sheet Offsetting Guidance

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Norwalk, Conn. (November 26, 2012)

By Michael Cohn

The Financial Accounting Standards Board has issued a proposed Accounting Standards Update aimed at clarifying the scope of transactions that would be subject to disclosures about offsetting of assets and liabilities on the balance sheet.

The FASB undertook this clarification project in response to concerns expressed by U.S. stakeholders about an earlier FASB standard’s broad definition of financial instruments. After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement, significantly increasing the cost of compliance at minimal value to financial statement users.

The proposed Accounting Standards Update—Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities—would clarify the scope of transactions that are subject to the new disclosures about offsetting. Stakeholders are asked to review and provide comments to FASB on the proposal by Dec. 21, 2012.

“This proposed update addresses questions surrounding the scope of balance sheet offsetting guidance issued last year by the FASB,” said FASB technical director Susan M. Cosper in a statement. “The goal is to reduce unintended costs while providing investors and other users with the information they need to understand the extent to which certain financial instruments are offset pursuant to master netting arrangements.”

The board’s proposed update would clarify the scope of Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.

Specifically, Update 2011-11 would apply to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement.

Issued last December, Update 2011-11 was the result of a joint project with the International Accounting Standards Board. Its objective was to improve transparency and comparability between U.S. GAAP and International Financial Reporting Standards by requiring enhanced disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement.

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