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Commission Regulation (EC) No
2237/2004 of 29 December 2004 amending Regulation (EC) No 1725/2003
adopting certain international accounting standards in accordance
with Regulation (EC) No 1606/2002 of the European Parliament and of
the Council, as regards IAS No 32 and IFRIC 1
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Offsetting a
Financial Asset and a Financial Liability (see also paragraphs
AG38 and AG39)
42. A financial
asset and a financial liability shall be offset and the net
amount presented in the balance sheet when, and only
when, an entity:
(a) currently has a
legally enforceable right to set off the recognised
amounts; and
(b) intends either
to settle on a net basis, or to realise the asset
and
settle the liability simultaneously.
In accounting for a
transfer of a financial asset that does not qualify
for derecognition, the entity shall not offset the transferred
asset and the associated liability (see IAS 39,
paragraph 36).
43. This Standard
requires the presentation of financial assets and financial
liabilities on a net basis when doing so reflects an entity’s
expected future cash flows from settling two or more separate
financial instruments. When an entity has the right to receive
or pay a single net amount and intends to do so, it has, in
effect, only a single financial asset or financial liability.
In other circumstances, financial assets and financial
liabilities are presented separately from each other
consistently with their characteristics as resources or
obligations of the entity.
44. Offsetting a
recognised financial asset and a recognised financial
liability and presenting the net amount differs from the
derecognition of a financial asset or a financial liability.
Although offsetting does not give rise to recognition of a
gain or loss, the derecognition of a financial instrument not
only results in the removal of the previously recognised item
from the balance sheet but also may result in recognition of a
gain or loss.
45. A right of
set-off is a debtor’s legal right, by contract or otherwise,
to settle or otherwise eliminate all or a portion of an amount
due to a creditor by applying against that amount an amount
due from the creditor. In unusual circumstances, a debtor may
have a legal right to apply an amount due from a third party
against the amount due to a creditor provided that there is an
agreement between the three parties that clearly establishes
the debtor’s right of set-off. Because the right of set-off
is a legal right, the conditions supporting the right may vary
from one legal jurisdiction to another and the laws applicable
to the relationships between the parties need to be considered.
46. The existence of
an enforceable right to set off a financial asset and a
financial liability affects the rights and obligations
associated with a financial asset and a financial liability
and may affect an entity’s exposure to credit and liquidity
risk. However, the existence of the right, by itself, is not a
sufficient basis for offsetting. In the absence of an
intention to exercise the right or to settle simultaneously,
the amount and timing of an entity’s future cash flows are
not affected. When an entity intends to exercise the right or
to settle simultaneously, presentation of the asset and
liability on a net basis reflects more appropriately the
amounts and timing of the expected future cash flows, as well
as the risks to which those cash flows are exposed. An
intention by one or both parties to settle on a net basis
without the legal right to do so is not sufficient to justify
offsetting because the rights and obligations associated with
the individual financial asset and financial liability remain
unaltered.
47. An entity’s
intentions with respect to settlement of particular assets and
liabilities may be influenced by its normal business practices,
the requirements of the financial markets and other
circumstances that may limit the ability to settle net or to
settle simultaneously. When an entity has a right of set-off,
but does not intend to settle net or to realise the asset and
settle the liability simultaneously, the effect of the right
on the entity’s credit risk exposure is disclosed in
accordance with paragraph 76.
48. Simultaneous
settlement of two financial instruments may occur through, for
example, the operation of a clearing house in an organised
financial market or a face-to-face exchange. In these
circumstances the cash flows are, in effect, equivalent to a
single net amount and there is no exposure to credit or
liquidity risk. In other circumstances, an entity may settle
two instruments by receiving and paying separate amounts,
becoming exposed to credit risk for the full amount of the
asset or liquidity risk for the full amount of the liability.
Such risk exposures may be significant even though relatively
brief. Accordingly, realisation of a financial asset and
settlement of a financial liability are treated as
simultaneous only when the transactions occur at the same
moment.
49. The conditions
set out in paragraph 42 are generally not satisfied and
offsetting is usually inappropriate when:
(a) several
different financial instruments are used to emulate the
features of a single financial instrument (a ‘synthetic
instrument’);
(b) financial assets
and financial liabilities arise from financial instruments
having the same primary risk exposure (for example, assets and
liabilities within a portfolio of forward contracts or other
derivative instruments) but involve different counterparties;
(c) financial or
other assets are pledged as collateral for non-recourse
financial liabilities;
(d) financial assets
are set aside in trust by a debtor for the purpose of
discharging an obligation without those assets having been
accepted by the creditor in settlement of the obligation (for
example, a sinking fund arrangement); or
(e) obligations
incurred as a result of events giving rise to losses are
expected to be recovered from a third party by virtue of a
claim made under an insurance contract.
50. An entity that
undertakes a number of financial instrument transactions with
a single counterparty may enter into a ‘master netting
arrangement’ with that counterparty. Such an agreement
provides for a single net settlement of all financial
instruments covered by the agreement in the event of default
on, or termination of, any one contract. These arrangements
are commonly used by financial institutions to provide
protection against loss in the event of bankruptcy or other
circumstances that result in a counterparty being unable to
meet its obligations. A master netting arrangement commonly
creates a right of set-off that becomes enforceable and
affects the realisation or settlement of individual financial
assets and financial liabilities only following a specified
event of default or in other circumstances not expected to
arise in the normal course of business. A master netting
arrangement does not provide a basis for offsetting unless
both of the criteria in paragraph 42 are satisfied. When
financial assets and financial liabilities subject to a master
netting arrangement are not offset, the effect of the
arrangement on an entity’s exposure to credit risk is
disclosed in accordance with paragraph 76.
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