First Impressions: Offsetting financial assets and financial liabilities

Transcription

1 IFRS First Impressions: Offsetting financial assets and financial liabilities Amendments to IAS 32 and IFRS 7 February 2012 kpmg.com/ifrs

2 Contents Evolution, not revolution 1 1. Setting the scene 2 2. How this could affect you 3 3. Step by step Application of the clarified offsetting criteria Application of the common disclosure requirements Effective date and transition 22 Appendix 1 Background to the offsetting amendments 24 About this publication 26

3 First Impressions: Offsetting financial assets and financial liabilities 1 Evolution, not revolution IASB clarifies offsetting model. IASB and FASB issue common offsetting disclosure requirements. The IASB and the FASB are maintaining their current offsetting models, and have issued common disclosure requirements. The IASB has built these new requirements into Amendments to IFRS 7. In addition, the IASB has published Amendments to IAS 32, clarifying how the current model should be applied. Although it is disappointing that the Boards have not been able to achieve convergence between IFRS and US GAAP offsetting requirements 1, users of financial statements will benefit from greater consistency in the application of IFRS, and the new disclosures will provide greater comparability between IFRS and US GAAP reporters. Many entities will find that application of the Amendments will come at a cost. The IASB has said that it always intended the offsetting criteria to be applied in the manner clarified by the Amendments; however, the impact of stepping into line could be significant for some, and the amendments are subject to retrospective application. Entities may have to revisit contracts, and might require legal assistance. In some cases, they may decide to amend the terms of contracts, or change counterparties so as to comply with the clarified offsetting criteria. Financial institutions are likely to be affected most. In particular, transactions through clearing houses may need to be scrutinised in order to understand whether they comply with the clarified criteria. There may also be wider business implications for some entities, because calculations based on IFRS financial statements may be affected. For example, amounts of some taxes and employee remuneration based on reported IFRS assets might change, and some entities may face difficulties with debt covenants based on reported IFRS liabilities or gearing. Therefore, entities may wish to manage stakeholders expectations, and communicate any impacts that are likely to be significant before the amendments come into effect. We hope that this publication will assist you in gaining a greater understanding of the impact of the amendments on your financial statements. Andrew Vials Chris Spall Enrique Tejerina KPMG s global IFRS Financial Instruments leadership team KPMG International Standards Group 1 Appendix 1 to this publication includes a description of the main differences between the IFRS and US GAAP models.

4 2 First Impressions: Offsetting financial assets and financial liabilities 1. Setting the scene The IASB and the FASB are no longer pursuing a converged offsetting model. However, they have issued common requirements for disclosing the actual and potential effects of netting arrangements on the entity s financial position. The IASB has amended IFRS 7 Financial Instruments: Disclosures to include these new requirements. In addition, the IASB has published Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32). These Amendments clarify the offsetting criteria in IAS 32 and address inconsistencies in their application. The Amendments to IAS 32 clarify that: an entity currently has a legally enforceable right to set-off if that right is: not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties; and gross settlement is equivalent to net settlement if and only if the gross settlement mechanism has features that: eliminate or result in insignificant credit and liquidity risk; and process receivables and payables in a single settlement process or cycle. The Amendments to IAS 32 are effective for annual periods beginning on or after 1 January 2014, and are to be applied retrospectively. The objective of the common disclosures is to help users of financial statements to understand the actual and potential effects of netting arrangements on the entity s financial position. The Amendments to IFRS 7 include minimum disclosure requirements related to financial assets and financial liabilities that are: offset in the statement of financial position; or subject to enforceable master netting arrangements or similar agreements. They include a tabular reconciliation of gross and net amounts of financial assets and financial liabilities, separately showing amounts offset and not offset in the statement of financial position. The Amendments to IFRS 7 are effective for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods, and are to be applied retrospectively.

5 First Impressions: Offsetting financial assets and financial liabilities 3 2. How this could affect you Some entities will have to change the way they apply the offsetting criteria. This could have a big impact on their statement of financial position. More extensive and transparent disclosures about rights of set-off may be needed. Banks and other financial institutions are likely to be most affected. Entities in the energy, airline and telecommunications sectors may also be significantly affected. If the statement of financial position is impacted, then there may also be an impact on the following items: regulatory capital requirements amounts of taxes or other levies on financial institutions management and employee remuneration compliance with debt covenants. Retrospective transition will require entities to prepare additional financial information. New or enhanced systems and processes may be needed. The following pages provide a detailed analysis of these impacts. If you expect that the amendments will significantly impact your financial statements, then you may wish to manage stakeholder expectations by communicating the expected impacts prior to the effective date of the amendments.

6 4 First Impressions: Offsetting financial assets and financial liabilities How this could affect you detailed analysis Some entities will have to change the way they apply the offsetting criteria. This could have a big impact on their statement of financial position. More extensive and transparent disclosures about rights of set-off may be needed. Banks and other financial institutions are likely to be most affected. Entities in the energy, airline and telecommunications sectors may also be significantly affected. Regulatory capital requirements may be affected if based on IFRS financial statements. Amounts of taxes or other levies on financial institutions may change. The amounts offset may decrease if entities currently apply offsetting under rights of set-off that are not enforceable in the event of the default, insolvency or bankruptcy of either the entity itself or a counterparty. The amounts offset under settlement systems through clearing houses may be affected by the Amendments depending on: whether entities currently consider such systems as meeting the criterion to settle net or simultaneously under IAS 32; and whether the clearing house s settlement system provides for net settlement or gross settlement that is equivalent to net settlement in accordance with the clarifications included in the Amendments. Due to the current trend towards the use of central counterparties for more types of financial instruments, the impact of this change may become more significant over time. Entities will have to provide disclosure about: what amounts have been offset in the statement of financial position; and the nature and extent of rights of set-off under master netting arrangements or similar agreements. These entities may engage in multiple derivative and other transactions with financial market counterparties and clearing houses. Such transactions may include complex settlement and margining arrangements. Therefore, offsetting, or not offsetting, can have a big impact on their reported assets and liabilities and on leverage and gearing ratios. Entities within the energy sector may have contracts to sell and deliver energy for trading purposes, or financial assets and financial liabilities that arise from such contracts subsequent to the performance of the energy delivery. The resulting cash flows may or may not qualify for offsetting based on the Amendments. Entities within the airline and telecommunications sectors have significant receivables from and payables to other entities within their sector. These receivables and payables may or may not qualify for offsetting based on the Amendments. Basel bank regulatory capital requirements for offsetting derivatives and sale and repurchase agreements are not affected by the Amendments. However, financial institutions may be subject to additional national requirements, or requirements applying to non-banks. Whether these requirements are affected by the Amendments depends on the relevant regulatory rules. If impacted, entities may wish to campaign for adjustments to the calculation of regulatory capital requirements. Some jurisdictions have implemented, or are considering imposing, taxes or other levies on financial institutions based on assets or liabilities. Depending on how they are calculated, these may be impacted by the Amendments. If impacted, entities may wish to campaign for adjustments to the calculation of such taxes or other levies.

7 First Impressions: Offsetting financial assets and financial liabilities 5 How this could affect you detailed analysis Management and employee remuneration may change if calculated from IFRS financial statements. An entity may no longer be compliant with its debt covenants. Bonus schemes and management remuneration may have targets based on returns on assets, or they may be based on reducing reported assets or leverage. If these measures are calculated from IFRS financial statements, then they may be affected by the Amendments. If impacted, entities may wish to adjust their remuneration policies or targets. Debt agreements may impose limits on the amount of total debt or on the leverage or gearing of a borrower that are calculated based on IFRS amounts. The Amendments may increase the risk of breaching these covenants. If such a breach becomes probable, then an entity may need to: renegotiate debt covenants with the lender; secure replacement funding; or develop alternative plans. Retrospective transition will require entities to prepare additional financial information. New or enhanced systems and processes may be needed. Entities are required to apply the amendments to financial information in the current period and in each comparative period presented. IFRS requires an entity to present as a minimum two statements of financial position, and to present a third statement of financial position if the impact of the amendments is material. Regulatory requirements in some jurisdictions may require some entities to present more than one year of comparative information or summary historical financial data. In order to be able to obtain the data needed to provide this information retrospectively on implementation, some entities may need to develop a transition plan for parallel runs, including reconciliations. Management may have to invest time and money in systems and processes, including related controls, in order to apply the new offsetting criteria appropriately, and to collate the data required to meet the new disclosure requirements.

8 6 First Impressions: Offsetting financial assets and financial liabilities 3. Step by step Application of the common disclosure requirements Application of the clarified offsetting criteria Assess whether the entity currently has a legally enforceable right of set-off Assess intention to settle net or through a system that is equivalent to net settlement Set off qualifying amounts 7 8 Identify which instruments are within the scope Determine how to (dis)aggregate the quantitative disclosures Calculate the amounts to be disclosed Describe types and nature of rights of set-off that do not meet the offsetting criteria Determine whether additional disclosures are required Observations integrated project management Although the nature and effective dates of the IAS 32 and IFRS 7 amendments are different, there is a significant overlap and interrelationship in terms of their subject matter. Therefore, it may be efficient and effective to combine efforts in both adopting and applying each set of amendments. 3.1 Application of the clarified offsetting criteria IAS Under the criteria in IAS 32, offsetting is required when, and only when, an entity: Application of the clarified offsetting criteria 1 IAS 32.BC78 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. 2 3 Assess whether the entity currently has a legally enforceable right of set-off Assess intention to settle net or through a system that is equivalent to net settlement Set off qualifying amounts The Amendments address inconsistencies in applying the offsetting criteria and clarify: when an entity currently has a legally enforceable right to set off recognised amounts; and when gross settlement is equivalent to net settlement.

9 First Impressions: Offsetting financial assets and financial liabilities Step 1: Assess whether the entity currently has a legally enforceable right of set-off IAS 32.AG38B Under the Amendments, an entity currently has a legally enforceable right of set-off if the right is: not contingent on a future event; and enforceable both in the normal course of business, and in the event of default, insolvency or bankruptcy of the entity and all of the counterparties. IAS 32.BC82-84 IAS 32.BC81, 92 The Amendments clarify that, in order to qualify for offsetting, a right of set-off needs to be exercisable when the amounts are due and payable. They also clarify that the availability of a right of set-off cannot be contingent or conditional on a future event, because the right of set-off would not exist until, or would only exist up to, the occurrence of the contingency. In addition, it is made clear that the passage of time, and uncertainties in the amounts to be settled, are not considered contingencies. Under the Amendments, it is made explicit that the following do not reflect the entity s expected future cash flows and do not meet the objective of offsetting in IAS 32: rights of set-off that can only be enforced in the normal course of business; or rights of set-off that cannot be enforced in the event of the entity s own default, insolvency and bankruptcy. Observations change in application Currently, some entities may offset financial assets and liabilities on the basis of a right to set-off that might not be enforceable in all the circumstances envisaged in the Amendments. For example, some entities might apply offsetting today on the basis of a right to set-off that is not enforceable in the event of their own bankruptcy. This would not be permitted under the Amendments. Observations reassessment of contracts An entity will need to reassess its existing contracts to determine whether its current application of the offsetting criteria is consistent with the Amendments. Identification of rights of set-off that may qualify for offsetting To determine whether it currently has a legally enforceable right of set-off under the Amendments, an entity would generally consider: The counterparty(ies). For example, if settlement takes place through a clearing organisation, then an entity should determine whether this organisation is acting as a central principal counterparty, or whether individual clearing members are acting as principals, in order to identify the counterparty(ies) to the right of set-off. The terms of the contract. Laws in the relevant jurisdictions, including the relevant bankruptcy regimes. These might include, for example, the entity s own jurisdiction, the jurisdiction(s) of the counterparty(ies) and the jurisdiction(s) which govern the contract. Different sources that make up those laws. For example, statutes, regulations and court rulings. Legal opinions. It may be difficult to evaluate whether a right of set-off exists, and whether and when it is legally enforceable. This may require specialist knowledge, especially if the laws of multiple jurisdictions are relevant; it may therefore be necessary to obtain the opinion of legal experts.

10 8 First Impressions: Offsetting financial assets and financial liabilities Observations processes and systems In making and documenting its assessments, as well as tracking details of relevant transactions, an entity may be able to use data, processes and systems that are already used for regulatory, risk management or other financial reporting purposes. For example, legal enforceability may already be evaluated in the context of offsetting for regulatory capital purposes. Also, credit risk monitoring and fair value measurements of financial instruments may track and reflect some rights of set-off. Observations proactive management of contracts An entity may consider replacing existing contracts with counterparties in certain jurisdictions with contracts with counterparties in other jurisdictions, or changing contractual terms so as to achieve compliance with the clarified offsetting criteria prospectively. Observations legally enforceable for all counterparties IAS 32.42(a), AG38B, In order to meet the legally enforceable criterion in IAS 32.42(a), the Amendments state that the D, BC80 entity must currently have a non-contingent right of set-off that is enforceable in the normal course of business and in the event of default or insolvency/bankruptcy of the entity itself and of all the counterparties. For example, entity B enters into an agreement with entity C which gives B a right of set-off. In order for B to determine if its right meets the criterion in IAS 32.42(a), it evaluates whether it can enforce its right in the normal course of business as well as in the case of its own default/ insolvency/bankruptcy and in the case of entity C s default/insolvency/bankruptcy. In doing so, B considers whether C has any rights that do or might prevent B from enforcing its right of set-off. For example, if, in the event of C s bankruptcy, C could insist on separate settlement of any amounts due to and from B, then B s right of set-off would not be enforceable in those circumstances and it would not satisfy the criterion in IAS 32.42(a). Observations right of set-off that is exercisable upon termination of a contract IAS 32.AG38B, BC82 In many cases, termination of a contract may be contingent on an event that is outside of the entity s control e.g. the counterparty s default or bankruptcy. In such cases, the right of set-off is clearly conditional and could not qualify for offsetting. However, in some cases, termination of a contract may be a free choice of the entity and is therefore within the entity s control. The Amendments do not discuss whether events that are within the entity s control would be considered contingent on the occurrence of a future event. Therefore, it is not clear whether such rights could be considered currently legally enforceable. However, assume that a right of set-off arising on termination of a contract could be considered to be not contingent on a future event: even so, such a right on its own would not qualify for offsetting, unless termination would arise in the normal course of business and the entity intends to settle net.

11 First Impressions: Offsetting financial assets and financial liabilities 9 Illustrative example uncertainty as to amounts or timing of payments IAS 32.BC83, 84 Company B has a loan receivable of 100 from Company C that is due and payable on 30 June 201X. B has also written a net-cash-settled put option to C. Under this option, B is obliged to pay C the amount (if any) by which the market price of commodity X exceeds 10 on the exercise date. If the market price of commodity X is below 10 on the exercise date, no payment is required. The option matures on 30 June 201X. The option liability is today measured at its fair value of 30. The two transactions are subject to a right to set-off that requires net settlement of amounts due and payable on the same date in all circumstances. There are no collateral or margin arrangements. Can B offset the loan receivable due from C and the derivative liability owed to C in the following scenarios? Scenario 1 - The option is a European option exercisable only on 30 June 201X. Scenario 2 - The option is an American option exercisable at any time up to 30 June 201X. Scenario 1 Yes. The two transactions both fall due for settlement on 30 June 201X and the right of set-off ensures that settlement will be on a net basis. It is uncertain whether any amount will actually be due in respect of the option; however, if an amount does arise it will certainly be set off. The passage of time or uncertainties in amounts to be paid do not preclude an entity from currently having a legally enforceable right of set-off. The fact that payments subject to the right will only arise at a future date is not itself a contingency or condition that precludes offsetting. Scenario 2 No. Entity C could choose to exercise its option before 30 June 201X. If C does exercise early, Entity B does not have the right to set-off, and the two transactions will be settled separately Step 2: Assess intention to settle net or through a system that is equivalent to net settlement IAS 32.42(b),.AG38F An entity intends either to settle on a net basis or to realise the asset and settle the liability simultaneously only if the intended settlement mechanism provides for: actual net settlement; or gross settlement with features that: eliminate or result in insignificant credit and liquidity risk; and process receivables and payables in a single settlement process or cycle. IAS 32.AG38F The Amendments state, for example, that a gross settlement system with all of the following features would be equivalent to net settlement. a) Financial assets and financial liabilities are submitted for processing at the same point in time. b) The parties are committed to fulfil the settlement obligation once the financial assets and financial liabilities are submitted. c) Once submitted, there is no potential for the cash flows arising from the financial assets and financial liabilities to change (unless processing fails see (d)). d) Assets and liabilities that are collateralised with securities are settled on a system so that the processing of the receivable or payable fails if the transfer of the related securities fails (and vice versa). e) Failed transactions are re-entered for processing until they are settled.

12 10 First Impressions: Offsetting financial assets and financial liabilities f) The same settlement institution carries out the settlement. g) There is an intraday credit facility that: provides sufficient overdraft amounts to each party at the settlement date; and is virtually certain to be honoured if called upon. Observations reassessment of gross settlement systems requires judgement IAS 32.AG38F(g) An entity should reassess all gross settlement systems to determine whether its application of the offsetting criteria is consistent with the Amendments. Relevant settlement systems may include the systems of clearing houses and central counterparties. Such systems may provide for settlement of a huge number of complex derivative contracts, with cash flows spreading out many years in the future. Additionally, such systems may include complex settlement and margining arrangements. The Amendments describe the conditions that gross settlement systems need to satisfy in order to be equivalent to net settlement. The Amendments also contain an example of a gross settlement system with certain characteristics that make it equivalent to net settlement. For example, the characteristic described in IAS 32.AG38F(g) refers to intraday credit facilities that: provide sufficient overdraft amounts to enable processing of payments at the settlement date for each of the parties; and are virtually certain to be honoured if they are called upon. Whether such a facility is honoured when called upon may depend on the intention and ability of the provider of the facility and the characteristics of each counterparty. Therefore, determining whether a gross settlement system is equivalent to net settlement may require detailed analysis and significant judgement. Observations proactive management of membership of clearing houses An entity may consult with the clearing houses of which it is a member, and with the other members, to determine whether a central or collective evaluation of the settlement processes would be effective and efficient. Also, if necessary an entity may consider working with clearing houses and other members to change the characteristics of gross settlement systems so that they are considered equivalent to net settlement Step 3: Set off qualifying amounts Observations determine amounts that qualify for offsetting and calculate net amount Based on the work performed under Steps 1 and 2, the entity: identifies all financial assets and financial liabilities that qualify for offsetting; determines the amounts that qualify for offsetting; and calculates the net amounts to present in the statement of financial position.

13 First Impressions: Offsetting financial assets and financial liabilities Application of the common disclosure requirements IFRS 7.13A IFRS 7.13C The disclosures include minimum requirements related to financial assets and financial liabilities that are: offset in the statement of financial position; or subject to enforceable master netting arrangements or similar agreements. criteria They include a tabular reconciliation of gross and net 8 Determine whether additional amounts of financial assets and financial liabilities, disclosures are required separately showing amounts offset and not offset in the statement of financial position. An entity is required to disclose each of the following amounts separately. a) The gross amounts. b) The amounts offset in accordance with the offsetting criteria in IAS 32. c) The net amounts presented in the statement of financial position i.e. the difference between (a) and (b). These amounts should be reconciled to the line item amounts presented in the statement of financial position. d) The amounts subject to enforceable master netting arrangements or similar agreements that do not qualify for offsetting under IAS 32, including: i) amounts related to recognised financial assets and financial liabilities that do not meet the offsetting criteria; and ii) amounts related to financial collateral. The disclosures include a description of the types and nature of the rights under those arrangements. e) The net amount after deducting the amounts in (d) from those in (c). Application of the common disclosure requirements 4 Identify which instruments are within the scope Determine how to (dis)aggregate the quantitative disclosures Calculate the amounts to be disclosed Describe types and nature of rights of set-off that do not meet the offsetting Step 4: Identify which instruments are within the scope IFRS 7.13A, B40 The common disclosure requirements apply to financial assets and financial liabilities that are: offset in the statement of financial position; or subject to enforceable master netting arrangements or similar agreements. Therefore, an entity needs to identify all financial assets and financial liabilities that fall within these two categories. a) Financial assets and financial liabilities that are offset in the statement of financial position Based on Steps 1 to 3, an entity identifies the financial assets and financial liabilities that are offset in the statement of financial position.

14 12 First Impressions: Offsetting financial assets and financial liabilities b) Financial assets and financial liabilities that are subject to master netting arrangements or similar agreements Observation master netting arrangements or similar agreements IAS The Amendments do not provide a definition of the term master netting arrangements or similar agreements. However, IAS 32 gives the following as characteristics of master netting arrangements: they provide for net settlement of financial instruments covered by the agreement in the event of default on, or termination of, any one contract; they provide protection against losses when a counterparty is unable to meet its obligations; and they create an enforceable right of set-off that may be realised or settled only following an event of default, insolvency or bankruptcy. An entity may need to use judgement to identify master netting arrangements or similar agreements. IFRS 7.B41 The Amendments explain that their scope includes financial assets and financial liabilities subject to similar agreements that cover similar financial instruments and transactions. Term Similar agreements Includes Derivative clearing agreements Global master repurchase agreements Global master securities lending agreements Any related rights to financial collateral Similar financial instruments and transactions Derivatives (Reverse) Sale and repurchase agreements Securities borrowing and lending agreements IFRS 7.B41 Financial instruments that are outside the scope of the disclosure requirements (unless offset in the statement of financial position) include: loans and customer deposits at the same institution; and instruments subject only to a collateral agreement. Observations tagging and tracking To identify the financial assets and financial liabilities subject to a master netting arrangement or a similar agreement, the entity s information systems would need to be capable of tagging and tracking all such assets and liabilities.

15 First Impressions: Offsetting financial assets and financial liabilities Step 5: Determine how to (dis)aggregate the quantitative disclosures An entity determines: how to aggregate the amounts under IFRS 7.13C(b) and (d), based on their nature and their (potential) effect on the entity s statement of financial position and net exposure; and the approach it will take to group the amounts that are subject to the minimum disclosures. IFRS 7.B51, 52 There are two approaches to grouping amounts: Minimum disclosure requirements IFRS 7.13C Grouping approach 1 Grouping approach 2 a) Gross amounts by type by type b) Amounts offset by type by type c) Net amounts presented in statement of financial position i.e. (a) minus (b) by type by type and counterparty d) Amounts of remaining rights of set-off that do not qualify for offsetting by type by counterparty e) Net amount i.e. (c) minus (d) by type by counterparty IFRS 7.B51 IFRS 7.B52 IFRS 7.IG40D Entities are permitted to group all amounts by type of financial instrument or transaction e.g. derivatives, repurchase and reverse repurchase agreements, or securities borrowing and lending agreements. If an entity discloses the amounts under (c) to (e) by counterparty, then the amounts related to individually significant counterparties are disclosed separately. Although an entity is not required to identify any counterparties by name, it is required to label counterparties consistently from year to year, to enhance comparability. Any individually immaterial counterparties that remain are then aggregated. The Amendments add examples to the implementation guidance that accompanies IFRS 7. These examples illustrate some possible ways to meet the minimum disclosure requirements. See Illustrative example Minimum quantitative disclosure requirements in section for an example that illustrates both grouping approaches Step 6: Calculate the amounts to be disclosed To satisfy the minimum disclosure requirements as included in paragraph 3.2, an entity does the following. Item How to calculate IFRS 7.13A, C(a), C(d), B41, 43 a) Gross amounts The entity calculates the gross amounts based on all recognised financial assets and financial liabilities that are within the scope based on Step 4. However, the gross amounts disclosed exclude any amounts recognised as a result of a right to financial collateral that does not meet the offsetting criteria. Collateral received or pledged arising from a right to financial collateral related to master netting arrangements or similar agreements that do not meet the offsetting criteria is included under item (d). Recognised financial assets and financial liabilities are included at their recognised amounts (e.g. amortised cost or fair value).

16 14 First Impressions: Offsetting financial assets and financial liabilities Item How to calculate IFRS 7.13C(b), B44 b) Amounts offset The entity calculates the amounts that have been offset in the statement of financial position in accordance with the offsetting criteria as determined under Step 3. IFRS 7.13C(c), B45, 46 IFRS 7.13C(d), B47, 48, 49 c) Net amounts presented in statement of financial position d) Amounts of remaining rights of set-off that do not qualify for offsetting The entity calculates the net amounts presented in the statement of financial position i.e. the difference between items (a) and (b). The required disclosures include a reconciliation between item (c) and individual line items. The entity calculates the amounts subject to an enforceable master netting arrangement or similar agreement that do not meet the offsetting criteria. Item (d)(i) For recognised assets and liabilities that do not meet the offsetting criteria, the amount disclosed relates to the recognised amounts to which the right of set-off applies. Item (d)(ii) For financial collateral received or pledged that is not offset in the statement of financial position, the amount disclosed is the fair value of the collateral actually pledged or received. However, in each case the entity limits the amounts disclosed to eliminate the effect of overcollateralisation. This adjustment is calculated at the level of the financial asset or the financial liability (or group of financial assets/ liabilities) to which the right to collateral relates. IFRS 7.13C(e) e) Net amount The entity calculates the net amount i.e. the difference between items (c) and (d). IFRS 7.B42 An entity discloses recognised financial assets and financial liabilities based on their carrying amounts. Different measurement requirements may apply to the constituent financial assets or financial liabilities within an individual line item in the statement of financial position. Therefore, offsetting may result in a presentation that includes measurement differences. For example, within a line item, a financial asset that is measured at fair value may be offset against a liability that is measured at amortised cost. An entity is required to describe any such measurement differences in the related disclosures that arise as a result of the offsetting. Observations reconciliation of disclosed net amounts IFRS 7.B 46 An entity is required to reconcile the disclosed net amounts included in the statement of financial position, item (c), to the individual line item amounts presented in the statement of financial position. The scope of the disclosures does not extend to all financial assets and liabilities: only some of the instruments within a particular line item might be captured, while others within that same line item are not. Therefore, the net amounts disclosed under item (c) may represent subsets of amounts presented in individual line items. See Illustrative example Minimum quantitative disclosure requirements below.

17 First Impressions: Offsetting financial assets and financial liabilities 15 Observations reconciliation of disclosed net amounts IFRS 7.13A, 13C(d), B41 Type of collateral Disclosure required under the following items Financial collateral received, that: Items (a), (b) and (c). relates to rights and obligations to exchange collateral that meet the offsetting criteria; and is recognised in the statement of financial position. Financial collateral received or pledged, that: Item (d)(ii). arises from rights and obligations related to master netting arrangements or similar agreements; and does not meet the offsetting criteria. All other collateral Disclosure not required based on the minimum quantitative disclosure requirements. Illustrative example minimum quantitative disclosure requirements This example shows how an entity might present the minimum quantitative disclosures. Derivatives Company C has the following transactions and balances related to its derivative activities. These transactions are subject to master netting agreements, and related rights and obligations to exchange financial collateral that do not qualify for offsetting. Table 1: Overview of carrying values of derivatives and collateral exchanged per counterparty Derivatives Collateral Assets Liabilities Cash paid Cash received Securities received Counterparty X Counterparty Y Counterparty Z Total Sale and repurchase agreements C also entered into the following sale and repurchase (repo) and reverse sale and repurchase (reverse repo) agreements with counterparty W.

18 16 First Impressions: Offsetting financial assets and financial liabilities Table 2: Overview of (reverse) sale and repurchase agreements and collateral exchanged (Reverse) sale and repurchase agreements Collateral Assets Liabilities Securities pledged Fair value Securities pledged Carrying amount Securities received Fair value Reverse repo receivable Repo payable Total The repo and reverse repo transactions are subject to a master netting agreement that creates a contingent right of set-off that does not qualify for offsetting. Therefore, C presents both the reverse repo receivable and the repo payable separately in its statement of financial position. IAS 39.37(d), IFRS (d) Securities received C has not sold or repledged the securities that it has received as collateral for its derivative assets and its reverse repo receivable. The securities are stated above at fair value. They are not recognised on C s statement of financial position. Other financial instruments In addition, C has gross customer loans and advances of 5,000, and gross customer deposit liabilities of 4,000. A loan of 500 and a deposit of 400 with customer D are offset in C s statement of financial position. Table 3: Amounts presented in C s statement of financial position Line item Assets Line item Liabilities Customer loans 4,600 Customer deposits 3,600 Derivatives 640 Derivatives 980 Right to receive cash collateral 700 Obligation to repay cash collateral 320 Reverse repo receivable 120 Repo payable 110 The amounts presented in C s statement of financial position relating to customer loans and customer deposits are net amounts i.e. after offsetting. A loan to D of 500 is partially offset by a deposit of 400 from D. IFRS 7.13C, B51, 52 How does C determine the amounts to be disclosed? The tables included on pages 17 to 19 show possible ways in which entity C may provide the minimum quantitative disclosures as required in IFRS 7.13C. The notes labelled (a) to (e) that follow the illustrative disclosures explain how the amounts are calculated.

19 First Impressions: Offsetting financial assets and financial liabilities 17 C's application of the quantitative disclosure requirements 13C(a)-(c) by type of financial instrument and 13C(c)-(e) by counterparty Financial assets subject to offsetting, enforceable master netting arrangements or similar agreements As at 31 December 20XX (a) (b) (c)=(a)-(b) Gross amounts of Net amounts of recognised financial financial assets Gross amounts of liabilities offset in presented in the Description of types of financial recognised financial the statement of statement of assets assets financial position financial position Derivatives Reverse repurchase, securities borrowing and similar arrangements Customer loans Total 1, (c) (d) (e)=(c)-(d) Related amounts not offset in the statement of financial position Net amounts of financial assets presented in the (d)(i), (d)(ii) (d)(ii) statement of Financial Cash collateral financial position instruments received Net amount Counterparty X Counterparty Y Counterparty Z Counterparty W Counterparty D Total

20 18 First Impressions: Offsetting financial assets and financial liabilities Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements As at 31 December 20XX (a) (b) (c)=(a)-(b) Gross amounts of Net amounts of recognised financial financial liabilities Gross amount of assets offset in presented in the Description of types of financial recognised financial the statement of statement of liabilities liabilities financial position financial position Derivatives Repurchase, securities lending and similar arrangements Customer deposits Total 1, ,090 (c) (d) (e)=(c)-(d) Related amounts not offset in the statement of financial position Net amounts of financial liabilities presented in the (d)(i), (d)(ii) (d)(ii) statement of Financial Cash collateral financial position instruments pledged Net amount Counterparty X Counterparty Y Counterparty Z Counterparty W Counterparty D Total 1,

21 First Impressions: Offsetting financial assets and financial liabilities 19 C's application of the quantitative disclosure requirements 13C(a)-(e) by type of financial instrument Financial assets subject to offsetting, enforceable master netting arrangements or similar agreements As at 31 December 20XX (a) (b) (c)=(a)-(b) (d) (e)=(c)-(d) Related amounts not offset in the statement of financial position Gross amounts of recognised Net amounts financial of financial Gross liabilities assets amounts of offset in the presented in (d)(ii) recognised statement the statement (d)(i), (d)(ii) Cash Description of types of financial of financial of financial Financial collateral financial assets assets position position instruments received Net amount Derivatives Reverse repurchase, securities borrowing and similar agreements Customer loans Total 1, Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements As at 31 December 20XX (a) (b) (c)=(a)-(b) (d) (e)=(c)-(d) Related amounts not offset in the statement of financial position Gross amounts of recognised Net amounts financial of financial assets liabilities Gross amount offset in the presented in (d)(ii) of recognised statement the statement (d)(i), (d)(ii) Cash Description of types of financial of financial of financial Financial collateral financial liabilities liabilities position position instruments pledged Net amount Derivatives Repurchase, securities lending and similar agreements Customer deposits Total 1, ,

22 20 First Impressions: Offsetting financial assets and financial liabilities IFRS 7.13A, C(a), B40, 41, 43 a) Gross amounts Gross amounts are disclosed only for recognised assets and liabilities that are either offset in the statement of financial position or subject to a master netting agreement or a similar arrangement. These amounts include all the derivative assets and liabilities, and the reverse repo receivable and the repo payable. They also include the loan of 500 and the deposit of 400 that are actually offset in the statement of financial position. However, they do not include the other loans and deposits. Note also that the entire gross amounts of the loan and deposit with counterparty D are included. The cash collateral related to the derivatives has been recognised in C s statement of financial position and is governed by master netting agreements. However, amounts recognised as a result of a right to financial collateral related to master netting arrangements that do not meet the offsetting criteria are not disclosed under (a) instead, the collateral received or pledged is included under (d). Similarly, the carrying amount of the held-to-maturity investments that have been transferred under the repo agreement with W are not included under (a). b) Amounts offset in the statement of financial position The only recognised amounts that are actually offset relate to the loan of 500 and the deposit of 400 with counterparty D. Since the amount of the loan exceeds the amount of the deposit, the amount offset and disclosed is limited to the amount of the deposit. This amount appears in both the asset and liability tables. IFRS 7.13C(b), B44 c) Net amounts in the statement of financial position These represent the amounts determined in (a) less the amounts determined in (b). Because of the limited scope of the disclosures, net amounts of 100 and zero are disclosed for loans and deposits respectively. As these are different from the respective statement of financial position line items, C should include a reconciliation between them. IFRS 7.13C(c), B43 d) Amounts subject to master netting arrangements that are not offset related to derivatives l Financial instruments (d)(i), (d)(ii) Amounts of 270 represent recognised derivatives that do not meet the offsetting criteria. These amounts are limited by the smaller of the asset and liability amounts for each counterparty disclosed under (c). The amounts are included in both the asset and liability table to reflect the potential effect of the rights to set-off. IFRS 7.13C(d), D, B47, 48, 49 Also, C received collateral from Y in the form of securities with a fair value of 95. Of this, 80 has been disclosed in the assets table. The amount of financial collateral is limited to the relevant amount disclosed under (c) (i.e. 190 for Y) minus the amount of recognised financial instruments otherwise included in (d)(i) for that counterparty (i.e. 110 for Y). Accordingly, the total amount disclosed for derivatives in the assets table is 350 (i.e ). l Amounts related to cash collateral (d)(ii) C received cash collateral of 320 from X and paid cash collateral of 700 to Z. The collateral amounts received from or pledged to each of these counterparties relate to all derivatives with that counterparty. However, only 290 of the total 320 received from X has been disclosed. This is because the amount of financial collateral is limited to the amount disclosed under (c) (i.e. 420 for X) minus the amount of recognised financial instruments that do not qualify for offsetting for each counterparty (i.e. 130 for X).

23 First Impressions: Offsetting financial assets and financial liabilities 21 d) Amounts subject to master netting arrangements that are not offset related to (reverse) repo transactions l Financial instruments (d)(i), (d)(ii) Against its reverse repo receivable of 120 from W, C has a repo payable to W of 110 and has received collateral in the form of securities with a fair value of 135. However, the amount disclosed under (d) in the assets table is limited by the amount of the reverse repo receivable (120) presented in the statement of financial position and included under (a) and (c). Against its repo payable of 110 to W, C has a reverse repo receivable of 120 and has pledged collateral in the form of HTM securities with a fair value of 115. However, the amount disclosed under (d) in the liabilities table is limited by the amount of the repo payable (110) presented in the statement of financial position and included under (a) and (c). All disclosed amounts related to financial collateral are based on their fair values. Unlike the amounts under (b) and (d)(i), the amounts of financial collateral are included only once in the financial assets or the financial liabilities table, depending on whether they relate to a net amount of assets or liabilities. IFRS 7.13C(e) e) Net amount This represents the amounts included under (c) less the amounts included under (d). Because of the limits designed to eliminate the effect of overcollateralisation in (d), no net exposure amount can be less than zero. IFRS 7.B48, IAS 39.37(b), IFRS (b) Would the amounts included in the disclosures change if C had sold the securities that it received as collateral from Y? No. If C had sold the securities, then C would recognise a liability measured at fair value for its obligation to return the collateral. However, this liability would not be within the scope of the disclosures. C would continue to disclose the fair value of the securities received as collateral under (d)(i) Step 7: Describe types and nature of rights of set-off that do not meet the offsetting criteria IFRS 7.13E, B50 The entity describes the nature and the types of rights of set-off that do not meet the criteria for offsetting. The entity, for example, describes: conditional rights; the reasons why rights of set-off that are not contingent do not meet the offsetting criteria; and the terms of the related rights to financial collateral Step 8: Determine whether additional disclosures are required IFRS 7.B53 IFRS 7.B52 The specific disclosures required in the Amendments as described in Steps 4 to 7 are minimum requirements. An entity supplements them with additional qualitative disclosures if this is necessary to enable financial statement users to evaluate the actual or potential effect of netting arrangements on its financial position. When disclosing quantitative information by counterparty, an entity considers qualitative disclosure about the types of counterparties.