Offsetting is the presentation of one or more recognised assets and liabilities, or items of income and expense, as a single net amount in the primary financial statements.
The general rule in IFRS 18.44 is that assets and liabilities, income and expenses, and cash flows must not be offset unless an IFRS Accounting Standard requires or permits it. Improper offsetting can obscure the existence, scale and nature of separate rights and obligations and reduce the understandability of transactions and other events affecting the entity.
Instances in which offsetting is permitted or required include:
- Gains and losses arising from a group of similar transactions may be presented on a net basis under IFRS 18.B28. Examples include foreign exchange gains and losses and gains and losses arising on financial instruments held for trading. However, the gains and losses must be disclosed separately in the notes if this provides material information.
- Revenue is reported net of discounts, rebates, refunds, credits, price concessions, incentives and consideration payable to a customer. Revenue also excludes amounts collected on behalf of third parties, such as sales taxes or VAT. In addition, an agent recognises as revenue only its fee or commission, which will often be the net amount retained after paying the principal.
- Financial assets and financial liabilities are offset under IAS 32 when the specified criteria for offsetting are met.
- Gains and losses on the disposal of non-current assets are presented net as proceeds less the carrying amount and selling expenses (IFRS 18.B27(a) and IAS 16.71).
- Borrowing costs eligible for capitalisation in relation to specific borrowings under IAS 23 are determined as the actual borrowing costs incurred less investment income earned from the temporary investment of those borrowings.
- Discontinued operations are presented as a single post-tax amount in the statement of comprehensive income under IFRS 5. In addition, the net cash flows attributable to the operating, investing and financing activities of discontinued operations are presented or disclosed. However, the assets of a disposal group and the related liabilities must be presented separately and must not be offset.
- Items of OCI may be presented either net of the related tax effects or before tax, with a single aggregate amount for income tax (IFRS 18.94).
- Cash flows may be reported on a net basis where IAS 7 permits or requires that presentation.
- Income tax assets and liabilities are offset under IAS 12 when the specified criteria for offsetting are met.
- Contract assets and contract liabilities are presented on a net basis at the level of an individual contract under IFRS 15.
- Net interest on a net defined benefit liability or asset under IAS 19 is determined by applying the discount rate to the net liability or asset. Separate interest income on plan assets and interest cost on the obligation are therefore not presented as gross line items. Similarly, the net defined benefit liability or asset is presented in the statement of financial position as the deficit or surplus, adjusted for any effect of the asset ceiling. The deficit or surplus is determined by deducting the fair value of plan assets from the present value of the defined benefit obligation.
- Government grants related to assets may be deducted in determining the carrying amount of the asset under the accounting policy choice in IAS 20. Similarly, grants related to income may be deducted when reporting the related expense.
- The expense relating to a provision may be presented net of reimbursement income under IAS 37. However, the reimbursement asset is recognised separately and is not offset against the provision.
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By contrast, IFRS 18.45 clarifies that measuring assets net of valuation allowances is not offsetting. Examples include impairment losses on non-financial assets under IAS 36, expected credit losses on financial assets under IFRS 9 and write-downs of inventories to net realisable value under IAS 2. Instead, these adjustments form part of the application of the relevant measurement basis to the assets.