December 2013
Time for Transition: IAS 32 amendmentsOffsetting financial
assets and financial liabilities
Will the clarification of IAS 32’s offsetting requirements
affect your financial statements? Do you
have:•financialinstrumentspresentednet
under the current requirements of IAS 32?
•clearingarrangementswithcentralcounterparties?
•contractsthataregovernedoraffectedby the laws of different
jurisdictions?
•differentcontractualtermsfromoneperiod to another?
•transactionssettledthroughgrosssettlement systems?
The effective date of 1 January 2014 is upon us …
Clarified guidance, further considerations
Some entities will have already analysed the impact of adopting
the amendments to IAS 321 on their ability to offset financial
assets and financial liabilities in their financial statements.
Others, however, may be delaying their analysis until the period of
adoption – perhaps basing this decision on the fact that the
amendments only clarify the existing offsetting requirements in IAS
32.
Although some of the changes may seem subtle, the impact of
stepping into line could be significant for some, and the amendment
requires retrospective application – with a third statement of
financial position required if the effect on the preceding period
is material. Entities may need to revisit contracts, and might
require legal assistance as a result.
Financial institutions are likely to be affected most but the
changes may also impact energy, utilities and telecom entities. In
particular, transactions through clearing houses may need to be
analysed to check whether they comply with the clarified criteria.
But there may be wider implications for some entities, because of
the effects on calculations that are based on balance sheet amounts
– e.g. debt covenants, taxes or remuneration schemes. With this in
mind, you may need to take steps to prepare for the practical
implications and manage stakeholders’ expectations.
1 Offsetting Financial Assets and Financial Liabilities
(Amendments to IAS 32), issued December 2011
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All rights reserved.
Do you have ...
… financial instruments presented net under the current
requirements of IAS 32?
You might have financial instruments presented net under the
current requirements of IAS 32, including contracts that are
cleared through central counterparties, where you may have to
change how you apply the offsetting criteria. For example, your
assessment of the enforceability of a legal right to set-off may
have been focused on whether the right to set-off was available in
the normal course of business and in the event of the
counterparty’s default, insolvency or bankruptcy. The clarified
offsetting criteria in IAS 32 require that the reporting entity’s
right to set-off should also be available in the event of the
entity’s own default, insolvency or bankruptcy. This may require
additional efforts, including legal advice, to establish whether
your right to set-off would survive your own default, insolvency or
bankruptcy as well as that of your counterparties.
… clearing arrangements with central counterparties?
You might have clearing arrangements with central counterparties
subject to complex contractual terms that are difficult to
interpret. It may be helpful to discuss with the clearing house or
compare thinking with other participants. You would need to
consider whether your counterparty has any rights that do or might
prevent you from enforcing your right to set-off – for example,
this might include a counterparty’s right to change settlement
requirements.
… contracts that are governed or affected by the laws of
different jurisdictions?
You might have contracts involving multiple jurisdictions. Where
this is the case, in determining whether your right to set-off is
currently available and legally enforceable in the normal course of
business and in the event of the default, insolvency or bankruptcy
and default, of yourself and counterparties, you might need to
consider laws in the relevant jurisdictions, including the relevant
bankruptcy regimes: this might include, for example, your own
jurisdiction, the jurisdiction(s) of the counterparty(ies) and the
jurisdiction(s) which govern the contract. As a result, the legal
analysis may be particularly challenging.
… different contractual terms from one period to another?
You might have been conducting transactions under different
contractual terms in different periods. Entities are required to
apply the clarified offsetting requirements retrospectively. This
means that you have to present comparative information on a
consistent basis. Therefore, when assessing the impact of the
offsetting amendments on comparative information, you will need to
apply the changed offsetting criteria based on the actual
contractual terms in force in each period.
… transactions settled through gross settlement systems?
You might have transactions settled through gross settlement
systems. The amendments now clarify that a gross settlement system
is equivalent to net settlement if it has features that eliminate
or result in insignificant credit and liquidity risk, and process
receivables and payables in a single settlement process or cycle.
With regulatory reforms mandating the use of central counterparties
for more contracts underway, you may find the impact of this
clarification of the standard significant. Gross settlement systems
that you use, or intend to use, may need to be analysed against the
clarified criteria in IAS 32.
How can we help?KPMG has experience in applying the clarified
requirements across many sectors, and can help you consider the
impact on your entity from accounting, tax and regulatory
perspectives, as well as the impact on your systems and processes,
business and people.
Download more in-depth publications: First Impressions:
Offsetting financial assets and financial liabilities
Speak to your usual KPMG contact
kpmg.com/ifrs
© 2013 KPMG IFRG Limited, a UK company, limited by guarantee.
All rights reserved.
KPMG International Standards Group is part of KPMG IFRG
Limited.
Publication name: Time for Transition: IAS 32 amendments –
Offsetting financial assets and financial liabilities
Publication number: 131023
Publication date: December 2013
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Time for Transition: IAS 32 Will the clarification of IAS 32’s
offsetting requirements affect your financial statements?Do you
have ...How can we help?