As a general principle, IFRSs prohibit offsetting, as stipulated by IAS 1.32. However, there are detailed provisions in IAS 32 relating to financial instruments, which mandate offsetting under certain circumstances. Specifically, a financial asset and a financial liability should be offset and the resultant net amount presented in the statement of financial position when an entity, as per IAS 32.42:
- Currently possesses a legally enforceable right to set off the recognised amounts; and
- Intends to either settle on a net basis, or to realise the asset and settle the liability concurrently.
These criteria are further discussed in paragraphs IAS 32.43-48 and AG38-AG39. Paragraph IAS 32.49 provides examples of scenarios where offsetting would be inappropriate.
Regarding conditional rights to set off, one of the points highlighted in the aforementioned paragraphs (IAS 32.AG38B-C) is that the legally enforceable right to offset should not be contingent on a future event. It must be enforceable under all circumstances, whether during the regular course of business or in the event of default, insolvency, or bankruptcy. When dealing with significant items, it is advisable to consult the bankruptcy or insolvency laws of the relevant jurisdiction. Conditional rights to set off (for instance, in case of bankruptcy) are not sufficient to meet the offsetting criteria.
Master netting agreements are typically conditional as well, and thus they do not fulfil the offsetting criteria as set out in IAS 32.50.
IAS 32 does not specifically state whether the offsetting criteria should be applied to whole financial instruments or to specified cash flows. Both approaches are acceptable, as discussed in the basis for conclusions paragraphs IAS 32.BC105-BC111.
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More about financial instruments
See other pages relating to financial instruments:
Scope of IAS 32
Financial Instruments: Definitions
Derivatives and Embedded Derivatives: Definitions and Characteristics
Classification of Financial Assets and Financial Liabilities
Measurement of Financial Instruments
Amortised Cost and Effective Interest Rate
Impairment of Financial Assets
Derecognition of Financial Assets
Derecognition of Financial Liabilities
Factoring
Interest-Free Loans or Loans at Below-Market Interest Rate
Offsetting of Financial Instruments
Hedge Accounting
Financial Liabilities vs Equity
IFRS 7 Financial Instruments: Disclosures