KPMG: New Offsetting Requirements Have More Impact on Entities Reporting Under US GAAP

Lucas Gilmore, “Big 4″ observer
February 11, 2011 /

Commenting on the recently released offsetting requirements jointly prepared by the International Accounting Standards Board (IASB) and the US-based Financial Accounting Standards Board (FASB), KPMG said the proposals have significant impact on companies reporting under the US GAAP.

On January 28, the IASB and FASB issued a proposal that eliminates the differences in offsetting requirements arising from financial instruments reporting under the International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (US GAAP).

According to the IFRS Foundation, the 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 proposal further states that offsetting the financial assets and financial liabilities is necessary if an entity has the legal right to do so and if the intention is to settle financial assets and financial liabilities as a single net amount, or as two gross amounts in financial statements.

“Although offsetting does not affect reported earnings, offsetting, or not offsetting, can have an enormous impact on reported assets and liabilities and significantly affect leveraging and gearing ratios calculated from an entity’s financial statements,” said Andrew Vials, global IFRS Financial Instruments leader of KPMG.

KPMG compares the requirements in the proposal with that in IAS 32 Financial Instruments: Presentation, saying that it affects more the entities reporting under US GAAP than those that use IFRS already.

“The proposals would eliminate the exception under US GAAP that allows offsetting for some arrangements in which the ability to offset is conditional and there is no intention to offset or the intention is conditional,” KPMG said.

However, the proposals would “amend IAS 32 by clarifying that, in order to enable offsetting, a right to set-off must be both unconditional and legally enforceable in all circumstances as opposed to the present requirement that an entity currently has the right to set-off,” it added.

With respect to derivatives and collateral, the proposal does not have a clear effect to entities reporting under the IFRS, KPMG said.


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