offsetting when & how?

As a rule, all assets and liabilities, and income and expenses are required to be reported separately unless specifically permitted by any specific IFRS. Offsetting in the statements of comprehensive income or financial position, except when this reflects the substance of the transactions or other events, detracts from the ability of users both to understand the transactions (or other events or conditions) that have occurred and to assess the entity’s future cash flows. Measuring assets net of valuation allowances (e.g. inventories or receivables) is not regarded as offsetting for the purposes of applying the above principle laid down in IAS 1.

Following are some examples where transactions are presented on net basis:

  • gains and losses on disposal of non-current assets, including investments and operating assets, are reported by deducting from the amount of consideration on disposal the carrying amount and related selling expenses
  • expenditure related to a provision that is recognised in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and reimbursed under a contractual arrangement with a third party (e.g. a supplier’s warranty agreement) may be netted against the related reimbursement
  • gains and losses arising from a group of similar transactions are reported on a net basis. For example, foreign exchange gains and losses, and gains and losses arising on financial instruments held for trading, are presented net although they should be reported separately if material

IAS 32 Financial Instruments: Presentation sets out more detailed requirements regarding the offset of financial assets and financial liabilities.

IAS 32 requires that a financial asset and a financial liability should be offset as a net amount in the statement of financial position when, and only when, both of the following conditions are satisfied:

  • The entity currently has a legally enforceable right to set off the recognised amounts of the asset and liability; and
  • The entity intends to settle on a net basis, or to realise the asset and settle the liability simultaneously.

The assertion that both conditions exists at time become difficult to maintain. For example:

It is common for entities to have amounts on deposit with a financial institution and simultaneously have a drawn-down borrowing facility, sometimes referred to as an ‘overdraft’, with the same financial institution. The entity has a separate financial asset and a financial liability with the same counterparty. It is usually not possible to achieve offset for the asset and the liability because, in most cases, the entity cannot assert that the asset will be used to settle the liability. The asset will rise and fall as the entity places further cash on deposit or withdraws cash to settle other obligations. Although the asset at the reporting date could be used to settle the overdraft, the entity cannot claim offset because the entity does not have the intention at the reporting date to settle the overdraft liability with the deposit asset. Rather, the entity’s intention is to use the deposit asset at the reporting date, and potentially draw down more borrowings if needed to meet its working capital needs.

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