The Financial Accounting Standards Board and the International Accounting Standards Board have published a proposal to establish a common approach to offsetting financial assets and liabilities on the balance sheet.

Offsetting, otherwise 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 circumstances under which financial assets and liabilities currently may be presented in an entity’s balance sheet or statement of financial position as a single net amount, or as two gross amounts, differs depending on whether the entity reports using International Financial Reporting Standards or U.S. GAAP.  

The accounting differences result in the single largest quantitative difference in reported numbers in statements of financial position prepared in accordance with IFRS or U.S. GAAP.  This reduces the comparability of financial statements, and is especially prominent in the presentation of derivative assets and derivative liabilities by financial institutions.

As a result, users and preparers of financial statements have asked the boards to find a common solution for offsetting those items. Proposing a common solution is also consistent with requests from the G20 and the Financial Stability Board.

“This proposal would eliminate a major difference in reporting relating to financial instruments under U.S. GAAP and IFRS,” said FASB chairman Leslie Seidman in a statement. “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 U.S. 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.”

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. Provided all of these requirements are met, offsetting would be required. The proposals would amend IFRS and U.S. GAAP and eliminate several industry-specific netting practices.

“The fact that companies can, in some instances, report IFRS balance sheet figures that are double the size of their U.S. GAAP numbers is not acceptable in global capital markets,” said IASB chairman Sir David Tweedie. “Investors, and the FSB, G20 and others, have all called upon the IASB and the FASB to resolve this problem.  The proposals would eliminate the differences in offsetting requirements.

The exposure draft “Offsetting Financial Assets and Financial Liabilities [FASB: Balance Sheet (Topic 210): Offsetting]” is open for public comment until April 28, 2011 and can be accessed via the IASB and FASB Web sites. During the consultation period, the IASB and FASB will undertake further outreach to seek views on the proposals. 

An interactive webcast by the IASB on the proposals will be held at 5:00 am Eastern time on January 31, and repeated at 10:00 am Eastern time on the same day. To register, please click here. A summary of the proposals from the IASB is available here. A “FASB in Focus” document offering an additional overview will be posted on the FASB Web site.

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