On December 16, 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The ASU is the result of a joint project with the IASB designed to enhance and provide converged disclosures about financial and derivative instruments that are either offset on the balance sheet, or are subject to an enforceable master netting arrangement (or other similar arrangement). The ASU does not change the conditions for when offsetting is appropriate in US GAAP. However, those conditions differ under IFRS, which results in the single largest financial reporting difference for certain financial institutions. As a result, the FASB and IASB designed the new disclosures to reconcile US GAAP and IFRS primarily through the requirement to present information on both a “gross” and “net” basis in the footnotes.
Scope, Effective Date and Transition
The ASU is applicable to all entities that have financial instruments and derivative instruments that are either offset in accordance with ASC 210-20-45 or ASC 815-10-45, or are subject to an enforceable master netting arrangement (or similar arrangement). This includes derivatives, sale and repurchase agreements, and securities borrowing and securities lending arrangements. However, assuming an entity is not party to a master netting arrangement and does not offset assets and liabilities on the balance sheet, the new disclosures do not apply. Further, loans and customer deposits at the same financial institution and financial instruments that are only subject to a collateral agreement are also excluded from the disclosure requirements.
The ASU is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. Retrospective application of the disclosures is required for all periods presented within the financial statements.
Background
In the Codification, a “right of setoff” exists when all of the following conditions are met under ASC 210-20-45-1:
- Each of two parties owes the other determinable amounts.
- The reporting party has the right to set off the amount owed with the amount owed by the other party.
- The reporting party intends to set off.
- The right of setoff is enforceable at law.
These conditions apply to all industries for arrangements between two parties. However, a reporting entity may elect to present the assets and liabilities separately even if all four conditions are satisfied. ASC 210-20-45-2 provides that netting is elective, not required.
Disclosure Requirements
In general, an entity should disclose the effect or potential effect of any rights of setoff associated with recognized assets and liabilities within the scope of the ASU. This information should enable financial statement users to evaluate the impact or potential impact of netting arrangements on its balance sheet. To achieve this objective, the ASU requires the following quantitative disclosures:
- The gross amounts of those recognized assets and those recognized liabilities
- The amounts offset in accordance with the guidance in ASC 210-20-45 and 815-10-45 to determine the net amounts presented in the statement of financial position
- The net amounts presented in the statement of financial position
- The amounts subject to an enforceable master netting arrangement or similar agreement not otherwise included in:
- The amounts related to recognized financial instruments and other derivative instruments that either:
- Management makes an accounting policy election not to offset.
- Do not meet some or all of the guidance in either ASC 210-20-45 or ASC 815-10-45.
- The amounts related to financial collateral (including cash collateral).
- The net amount after deducting the amounts in (d) from the amounts in (c).
The ASU prescribes that the information above be presented separately for assets and liabilities in a tabular format, unless another format is considered to be more appropriate. These disclosures may be grouped by type of instrument or transaction, such as derivatives and repurchase agreements. Alternatively, the disclosures in c) through e) above may be grouped by counterparty.
The ASU provides several illustrations of the quantitative disclosure requirements. Additionally, an entity should describe the rights of setoff associated with recognized assets or recognized liabilities subject to d) above. If any of the required disclosures are presented in separate notes to the financial statements, an entity should cross-reference between the notes.