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Wiley GAAP 2008 by Colorado Steven M. Bragg Englewood, Ralph Nach American Express Tax and Business Inc., Barry J. Epstein

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Offsetting Assets and Liabilities

In general, assets and liabilities are not permitted to be offset against each other unless certain specified criteria are met. FIN 39 permits offsetting only when all of the following conditions are met that constitute a right of setoff:

  1. Each of the two parties owes the other determinable amounts (although they may be in different currencies and bear different rates of interest).

  2. The enterprise has the right to set off the amount it owes against the amount owed to it by the other party.

  3. The enterprise intends to set off the two amounts.

  4. The right of setoff is legally enforceable.

In particular cases, state laws or bankruptcy laws may impose restrictions or prohibitions against the right of setoff. Furthermore, when maturities differ, only the party with the nearest maturity can offset, because the party with the later maturity must settle in the manner determined by the party with the earlier maturity.

The offsetting of cash or other assets against a tax liability or other amounts due to governmental bodies is acceptable only under limited circumstances. When it is clear that a purchase of securities is in substance an advance payment of taxes payable in the near future and the securities are acceptable for the payment of taxes, amounts may be offset. Primarily this occurs as an accommodation to governmental bodies that issue tax anticipation notes in order to accelerate the receipt of cash from future taxes.

For forwards, interest rate swaps, currency ...

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