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FASB Clarifies Scope of Offsetting Disclosures

Tammy Whitehouse | January 31, 2013

The Financial Accounting Standards Board has put to rest any worry that its new disclosure requirements around offsetting might apply to a much wider range of netting arrangements than FASB intended.

FASB has issued Accounting Standards Update No. 2013-01 to clarify the scope of an earlier pronouncement, ASU No. 2011-11, which establishes new requirements for disclosures about offsetting assets and liabilities. In its latest rule, FASB says it didn't intend for ordinary trade receivables to be subject to the new offsetting disclosure requirements contained in ASU No. 2011-11.

FASB adopted the new disclosure requirements to tell companies when they have assets and liabilities that offset one another, like derivative contracts with repurchase agreements, they need to provide some new disclosures if such items are presented on a net basis rather than a gross basis in the balance sheet. The idea when FASB issued the standard in December 2011 was to create more comparability between companies reporting under U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. GAAP permits netting of such arrangements, but IFRS does not.

According to the original standard, new disclosures would be required for financial instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement. As companies prepared to implement the new standard, questions surfaced about whether it would also apply to netting arrangements such as those manufacturing companies often have with their customers for product and supply purchases. GM, for example, pointed out to FASB that the language of the rule would seem to include customer and supplier agreements.

FASB acknowledged that many contracts with standard commercial provisions could equate to master netting arrangements, increasing the cost to comply with the standard while providing no meaningful new value to financial statement users. The board responded with the recent ASU to indicate that it didn't intend for such trade agreements to be included in the scope of the standard. The latest update should allay any further concerns, said FASB Technical Director Susan M. Cosper in a statement. “The Update will reduce unintended costs while providing investors and other users with the information they need to understand the extent to which certain financial instruments are offset pursuant to master netting arrangements,” she said.