IASB, FASB Propose to Wipe Off Differences in Offsetting Requirements

Jack Humphrey, Regulatory journalist
January 28, 2011 /

The International Accounting Standards Board (IASB) and the US-based Financial Accounting Standards Board (FASB) have proposed to eliminate the differences in offsetting requirements arising from financial instruments reporting under the International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP).

The proposal comes after the request forwarded by investors, Financial Stability Board, G20 and others, to IASB and the FASB to come up with a common approach to offset the financial assets and financial liabilities on financial statements.

Offsetting is used by entities in presenting their rights and obligations to each other as a net amount in their financial statements.

“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,” IASB chairman David Tweedie said.

The present reporting requirements of IFRSs and GAAP are causing differences in the conditions in which an entity presents the financial assets and financial liabilities as a single net amount, or as two gross amounts in financial statements. These differences lead to the “single largest quantitative difference in reported numbers in statements of financial position,” which makes financial statements less comparable with each other most especially when entities report derivative assets and derivative liabilities, the IFRS said.

The IASB and FASB propose to apply offsetting “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 boards also recommend for a single payment or simultaneous settlement of the amounts due.

The proposals of IASB and FASB would eventually eliminate the differences arising from “industry-specific netting practices” under IFRS and GAAP.

The exposure draft Offsetting Financial Assets and Financial Liabilities is open for public comment until April 28, during which period the IASB and FASB will solicit further recommendations to improve the proposals.

 

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