Offsetting of Financial Instruments (IAS 32)

As a general rule, offsetting is not allowed in IFRS (IAS 1.32). However, IAS 32 contains specific provisions relating to financial assets and liabilities. In fact, it requires offsetting in certain circumstances. Namely, a financial asset and a financial liability should be offset and the net amount presented in the statement of financial position when an entity (IAS 32.42):

  1. currently has a legally enforceable right to set off the recognised amounts; and
  2. intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

The above criteria are discussed in paragraphs IAS 32.43-48;AG38-AG39. Examples of circumstances where offsetting is not appropriate are given in paragraph IAS 32.49.

Conditional rights to set off
One of the points discussed in the above paragraphs states that (IAS 32.AG38B-C) the legal enforceable right to set off must not be contingent on a future event and must be enforceable in all circumstances (during normal course of business and in the event of default, insolvency or bankruptcy). Therefore, it cannot be assumed that the right to set-off is automatically available outside of the normal course of business. For material items, it’s best to double check with the bankruptcy or insolvency laws in relevant jurisdiction. Conditional rights to set off (e.g. in the event of bankruptcy) are also insufficient to meet the offsetting criteria.

Master netting agreements usually are also conditional and therefore do not meet the offsetting criteria (IAS 32.50).

Unit of account
IAS 32 does not specify whether the offsetting criteria should be applied to entire financial instruments or to specified cash flows. Both approaches are acceptable as discussed in basis for conclusions paragraphs IAS 32.BC105-BC111.

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