An Executive Guide to IFRS: Content, Costs and Benefits to Business

Offsetting

Linked to financial instruments is the issue of offsetting, or netting. This is a presentation issue and involves presenting the net amount due under two opposite contracts. For example, if you were a builder who owed a car dealer €30,000 for the purchase of a truck, but the dealer owed you €20,000 for building a showroom, you have opposite contracts, and you might want to show in your balance sheet a net payable of €10,000, instead of a payable of €30,000 and a receivable of €20,000.

This is not usually a particularly significant issue for non-financial businesses, but it can be very significant for financial institutions that may have very many contracts in both directions with other financial institutions. At the moment the IFRS rules differ from those of the US, and non-US banks appear to have much larger balance sheets than their US counterparts, because the US banks are able to offset more widely.

The subject is dealt with in IAS 1 Presentation of Financial Statements, which carries a general prohibition of offsetting, except where another standard allows it in particular circumstances. IAS 32 Financial Instruments: Presentation makes such an exception. It allows assets and liabilities with the same counterparty to be offset in the financial statements (not in the accounting books) where (a) there is a legal and enforceable right to offset, and (b) the entity has the intention to pay net or make simultaneous settlement.

US GAAP, however, is less restrictive when ...