FASB Clarifies Coming Guidance on Balance Sheet Offsetting

Jan 13, 2011   

At its January 12, 2011 Board meeting, the Financial Accounting Standards Board (FASB) clarified the scope of coming criteria on when offsetting of financial assets and financial liabilities in the balance sheet is appropriate. These FASB guidelines will be critical to accounting for certain stock lending and stock borrowing transactions.

A year ago, in discussing International Accounting Standard (IAS) 32: Financial Instruments, the International Accounting Standards Board (IASB) and FASB noted that convergence was needed between IASB standards and FASB standards on the criteria for offsetting on the balance sheet. Therefore, FASB initiated a project to establish revised criteria on offsetting. However, in drafting the Exposure Draft for the Board, FASB staff noted that the scope of the project was not clearly defined and returned to the Board for clarification.

Currently, guidance on offsetting is contained in FASB Interpretation No. 39 (FIN 39), Offsetting of Amounts Related to Certain Contracts (March 1992). Nonfinancial assets and liabilities (and nonfinancial derivative products) are not within the scope of the Interpretation and, therefore, are not eligible for offsetting. However, under the IASB-FASB convergence project, the issue arose as to whether nonfinancial assets and liabilities should be addressed in the guidance. But on January 12, 2011, FASB decided that nonfinancial assets and liabilities are not within the scope of the project, thus offsetting is effectively not permitted for those assets and liabilities.

Although the Exposure Draft is not yet completed, past Board meetings have indicated that final FASB guidance will contain a requirement that entities offset a recognized financial asset and financial liability if the criteria for offset are met, whether the right of offset arises from a bilateral or a multilateral arrangement. Moreover, entities should information on the effect of those arrangements on an entitys net exposure, by category of financial instrument, including:

  1. The gross carrying amount;
  2. Amounts deducted as a result of the proposed offset criteria to determine the carrying amounts in the statement of financial position;
  3. The portion of the exposures that is covered by a legally enforceable netting agreement (other than in (2));
  4. The amount of financial instrument collateral (cash collateral and fair value of noncash financial asset collateral should be separately disclosed) obtained or pledged in respect to those assets and liabilities; and
  5. The net exposure after taking into account the effect of the items in (2) “ (4).

The Board has tentatively decided that such information should be presented in a single note and in a tabular format, unless another format is more appropriate. Additionally, financial assets and financial liabilities should be separately disclosed. Additionally, the Boards decided that an entity would also be required to provide a description of the nature of offset agreements for the amounts included in item (3) above.

While no deadline has been set by FASB for issuance of the guidance on offsetting, the Board has decided that the proposed Accounting Standards Update will have a 90-day comment period.

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