IASB: "Gross or net? That is the question" by Patricia McConnell
01 June 2011
Patricia McConnell, as a member of IASB, expressed the views on offsetting financial assets and financial liabilities.
Patricia McConnell mentioned in her articles that during IASB's outreach activities it found there was no consensus among investors on the usefulness of presenting information about financial assets and financial liabilities on a gross basis or net basis in the balance sheet. In addition, there was no consensus on what ‘net’ should reflect if financial instruments are presented in that way in the balance sheet.
Although the investors who provided input did not always express a clear preference for gross or net presentation of financial assets and financial liabilities in the balance sheet, there was a consensus that both gross and net information are useful, and that both are necessary for analysing financial statements and valuing entities. In addition, most investors urged the IASB and the FASB to develop a common standard on offsetting, particularly for financial institutions, and asked that the standard should be mandatory rather than allowing an accounting policy choice.
Currently, differences between the IASB’s and the FASB’s offsetting requirements are the cause of the single largest difference in the amounts presented in the balance sheets of financial institutions. US GAAP currently permits far more offsetting of financial assets and financial liabilities in the balance sheet than do IFRSs. Obviously, this impedes global comparability. Consequently, the exposure draft, which was developed jointly by the IASB and the FASB, proposes a common approach that would replace the current requirements in both IFRSs and US GAAP for offsetting financial assets and financial liabilities.
The IASB expects that the proposed offsetting criteria will result in a more significant change to financial statements prepared in accordance with US GAAP than to those that are prepared in accordance with IFRSs. The proposals would eliminate the exceptions for offsetting in US GAAP for arrangements in which the ability to set off is conditional and there is no intention to set off. Consequently, if the proposal is finalised in its current form, companies - particularly financial institutions - preparing financial statements using US GAAP are likely to report more financial assets and financial liabilities in their balance sheets. This may affect many financial ratios, including return on assets and leverage ratios. Changes, if any, required in the balance sheets of entities applying IFRSs are expected to be much less dramatic. The proposals modify the offsetting criteria in IFRSs by clarifying that the right to set off should not only be currently enforceable, but also enforceable at all times, including in the event of bankruptcy. The proposals also require disclosures in addition to those currently required in IFRSs and US GAAP.
Patricia McConnell described what offsetting means, what the main proposals of exposure draft are, what companies would disclose under the proposal, and why the boards decided to limit offsetting.
Full paper
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