mhm messenger: disclosure requirements about offsetting take effect in 2013
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Starting with 2013 financial statements, companies need to make additional disclosures about assets and liabilities that are offset on their balance sheets. These disclosures are expected to be helpful to users of financial statements, and they will be slightly less onerous than originally expected, thanks to a clarification issued by the FASB earlier this year as Accounting Standards Update 2013-01. This Messenger provides a timely reminder about the additional disclosure requirements and highlights the effects of the clarification.TRANSCRIPT
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Starting with 2013 financial statements, companies need to make additional disclosures about assets and liabilities that are offset on their balance sheets. These disclosures are expected to be helpful to users of financial statements, and they will be slightly less onerous than originally expected, thanks to a clarification issued by the FASB earlier this year as Accounting Standards Update 2013-01. This Messenger provides a timely reminder about the additional disclosure requirements and highlights the effects of the clarification.
The disclosure requirements
The purpose of the disclosures is to help financial statement users who said they need information about the gross amounts of certain assets and liabilities so they can reconcile statements prepared under US generally accepted accounting principles (US GAAP) with those prepared under international financial reporting standards (IFRS).
The disclosure requirements were introduced in Accounting Standards Update 2011-11 Disclosures about Offsetting Assets and Liabilities. They apply to financial instruments that are eligible for offsetting under US GAAP, including those that are subject to a master netting arrangement or similar arrangement
April 2013
Disclosure Requirements about Offsetting Take Effect in 2013
and those that meet the requirements provided in Accounting Standards Codification Section 210-20-45, Balance Sheet Offsetting, or Section 815-10-45, Derivatives and Hedging, Balance Sheet Netting. The general guideline under Topic 210 is that offsetting is permitted in situations where each of two parties owes the other a determinable amount and the reporting party has the right and intent to set off the amount it owes with the amount owed by the other party. The right of setoff must also be enforceable by law.
As discussed in MHM Messenger 5-12 dated February 28, 2012, the disclosure requirements are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods, and they include a tabular presentation of the following information:
(a) The gross amounts of the recognized assets and liabilities.
(b) The amounts offset to determine the net amounts presented in the statement of financial position.
(c) The net amounts presented in the statement of financial position.
(d) The amounts subject to an enforceable master netting arrangement or similar agreement not otherwise included in (b).
(e) The net amount after deducting the amounts in (d) from the amounts in (c).
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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM service provider to further discuss the impact on your financial statements.
Effects of the clarification
The clarification is rooted in concerns that were raised following the release of ASU 2011-11 about contracts that contain standard commercial provisions that could be considered the equivalent of a master netting arrangement and the risk of diversity in practice that might result if these contracts were accounted for differently by different companies. At issue were standard provisions that state all receivables and payables with a particular counterparty can be netted in an event of default.
In response to these concerns, Update 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, limits the scope of Update 2011-11 to:
• Recognized derivative instruments accounted for in accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset in accordance with either Section 210-20-45 or Section 815-10-45.
• Recognized derivative instruments accounted for in accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45.
This limitation on the scope is seen as a cost-effective way to meet the needs of users because trade payables and receivables that an entity has the intent to settle on a net basis in the ordinary course of business would be presented similarly on a net basis in both financial statements prepared in accordance with US GAAP and financial statements prepared in accordance with IFRS.
The clarification and the disclosure requirements have the same effective date.
For more information
If you have any specific questions about the new disclosure requirements, please contact Mike Loritz of MHM’s Professional Standards Group or your MHM service professional. You can reach Mike directly at [email protected] or 913-234-1226.
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