Financial Services Insights - November 2012 - Additional Disclosure Requirements Related to Balance Sheet “Netting” Take Effect in 2013

INTRODUCTION

In December, 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210):Disclosures about Offsetting Assets and Liabilities (the “ASU,” “ASU 2011-11”).  Prior to the issuance of this update, the FASB and the International Accounting Standards Board had attempted to reach a consensus on a converged set of requirements for allowing balance sheet offsetting or “netting.”  However, the two boards were unable to reach such a consensus and instead opted for a converged disclosure model related to offsetting assets and liabilities.  The additional disclosure requirements of ASU 2011-11 are intended to provide the information necessary to allow reconciliation between the different offsetting requirements of U.S. GAAP and International Accounting Standards.  The ASU had no impact on existing offsetting requirements under U.S. GAAP.  

The increased disclosure requirements of ASU 2011-11 are generally applicable in calendar year 2013 and could significantly impact private investment funds and broker-dealers.  Under the new standard, entities presenting financial instruments and/or derivatives may be required to present additional gross information about these instruments.  Management of such entities should review the new disclosure requirements detailed below and evaluate whether their existing process for gathering financial reporting data will be sufficient to generate the information needed to meet the new disclosure requirements.

OFFSETTING REQUIREMENTS UNDER U.S. GAAP

As noted above, ASU 2011-11 does not impact existing offsetting requirements under U.S. GAAP.  ASC 210-20-45-1 sets forth the general offsetting requirements as follows:
A right of setoff exists when all of the following conditions are met:

a. Each of two parties owes the other determinable amounts.
b. The reporting party has the right to set off the amount owed with the amount owed by the other party.
c. The reporting party intends to set off.
d. The right of setoff is enforceable at law.

Additionally, ASC 815-10-45 provides an exception to item (c) above for derivative instruments and related collateral.  For derivative instruments and related collateral subject to a master netting arrangement, the intent to set off is not a necessary condition for the right of setoff to exist.   An exception to item (c) above also exists for repurchase and reverse repurchase agreements provided that certain criteria detailed in ASC 210-20-45-11 are met.

When right of setoff exists, entities may, but are not required to, present assets & liabilities net.  The choice to offset or not should be applied consistently.

NEW DISCLOSURE REQUIREMENTS

The new disclosure requirements of ASU 2011-11 (codified in ASC 210-20-50-3) are set forth below.  It should be noted that these disclosure are required for financial instruments and derivatives that are offset in accordance with the guidance noted above and financial instruments and derivatives that are subject to an enforceable master netting arrangement or similar agreement irrespective of whether an entity decides to offset such assets and liabilities.

1. The gross amounts of those recognized assets and those recognized liabilities
2. The amounts offset to determine the net amounts presented in the statement of financial position
3. The net amounts presented in the statement of financial position
4. The amounts subject to an enforceable master netting arrangement or similar agreement not otherwise included in (b):
   1. The amounts related to recognized financial instruments and other derivative instruments that either:
      1. Management makes an accounting policy election not to offset.
      2. Do not meet some or all of the guidance in either Section 210-20-45 or Section 815-10-45.
       
   2. The amounts related to financial collateral (including cash collateral).
    
5. The net amount after deducting the amounts in (d) from the amounts in (c)

Additionally, the ASU requires a description of the rights of setoff associated with an entity’s recognized assets and liabilities subject to an enforceable master netting arrangement or similar agreement including the nature of those rights.  The information should be presented in a tabular format

Refer to Exhibit 1 for sample tabular presentation of the disclosures required by the ASU.

TRANSITION

Entities are required to apply these amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. These amended disclosure requirements are required to be presented retrospectively for all comparative periods presented.

Financial Services Insights - November 2012 

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