Get Offsetting Financial Instruments: Clarifying The Amendments - EY

The general principle is that assets and liabilities, or income and expenses should not be offset, unless explicitly required or permitted by the standard. Offsetting does not include measuring assets net of valuation allowances (for example, bad debt provisions, or stock provisions).

An entity must set off its financial assets and financial liabilities in its balance sheet when it intends to set off and has the legally enforceable right to do so in the normal course of business, default and bankruptcy. US GAAP provides a further exception for offsetting derivative instruments.

The two basic requirements of IAS 32 are that offsetting is applied if, and only if, an entity: currently has a legally enforceable right to set-off the recognised amounts; and. intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

The guidance states that “it is a general principle of accounting that the offsetting of assets and liabilities in the balance sheet is improper except where a right of setoff exists.” A right of setoff is a debtor's legal right, by contract or otherwise, to discharge all or a portion of the debt owed to another party ...

Offsetting, in accounting, is the presentation of assets and liabilities on a net basis in the primary financial statements.

Offset in investments To offset a futures position, a trader needs to enter an equal but opposite transaction. No further gains or losses are experienced from their position.

Examples of offset accounts are the allowance for bad debts (paired with the accounts receivable account) and the reserve for obsolete inventory (paired with the inventory account).

Offsetting has traditionally been required (or permitted) when there is both a right and intention to offset two or more contracts. The view is that offsetting in such situations, in effect, represents that the entity has a single financial asset or financial liability.