Balance sheet offsetting and derivatives disclosures

Questions often arise among accountants about the rules for balance sheet offsetting as they relate to derivatives – and in particular about the associated disclosures, including disclosures when netting arrangements are involved.

The necessary disclosure requirements are provided, and the scope of the entities required to make such disclosures is set, by the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) Topic 210-20-50.

Disclosures related to balance sheet offsetting apply to derivatives accounted for in accordance with FASB ASC 815, Derivatives and Hedging. These include bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with FASB ASC 210-20-45 or FASB ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.

What is a “master netting arrangement”?

The best description of what should be considered a master netting arrangement is in FASB ASC 815-10-45-5. There, a master netting arrangement is considered to exist if a reporting entity has multiple contracts, whether for the same type of derivative instrument or for different types of derivative instruments, with a single counterparty, that are subject to a contractual agreement that provides for net settlement of all contracts through a single payment in a single currency in the event of default or on termination of any one contract.

Given the lack of definitive guidance as to whether a master netting arrangement actually even exists, a significant amount of judgment, and perhaps even legal analysis, often is required to determine whether transactions are considered within the confines of a master netting arrangement or similar agreement.

What are the disclosure requirements?

Reporting entities’ financial statements need to disclose information to enable users of financial statements to evaluate the effect or potential effect of netting arrangements on financial position for recognized assets and liabilities, where applicable. To meet the objective of the disclosure requirements, reporting entities need to disclose, at the end of the reporting period, the following quantitative information separately for assets and liabilities that are within the scope of FASB ASC 210-20-50-1:

  1. The gross amounts of those recognized assets and recognized liabilities
  2. The amounts offset in accordance with the guidance in FASB ASC 210-20-45 and 815-10-45 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 enforceable master netting arrangements or similar agreements not otherwise included in (b):
  • The amounts related to recognized financial instruments and other derivative instruments that management makes an accounting policy election not to offset or that do not meet some or all of the guidance in either FASB ASC 210-10-45 or 815-10-45
  • The amounts related to financial collateral (including cash collateral)
  1. The net amount after deducting the amounts in (d) from the amounts in (c)

The disclosures above need to be presented in a tabular format, separately for assets and liabilities, unless another format is more appropriate. A tabular format is generally expected for the disclosures.

The total amount disclosed in item (d) for an instrument cannot exceed the amount disclosed in accordance with item (c) for that instrument.

While disclosures need to be made related to recognized assets and recognized liabilities, the tabular format display for both assets and liabilities is pretty much the same. An example of how the tabular presentation might be presented when addressing recognized assets in the statement of financial position is as follows:

Gross Amounts Not Offset in the Statement of Financial Position

Gross amounts of recognized assets Gross amounts offset in the statement of financial position Net amounts of assets presented in the statement of financial position Financial instruments Cash collateral received Net amount
1 2 3=1-2 4a 4b 5=3-4

If the presentation was addressing the display of recognized liabilities, the caption wording in column 1 would be modified from recognized assets to recognized liabilities. The caption wording in column 3 would relate to net amounts of liabilities presented, and the caption wording in column 4b would address cash collateral pledged when compared to cash collateral received.

An entity should provide a description of the rights of setoff associated with an entity’s recognized assets and recognized liabilities subject to an enforceable master netting arrangement or similar agreement disclosed in accordance with (d) above, including the nature of those rights. – Bob Durak, CPA, CGMA, Director of AICPA Center for Plain English Accounting