Clarified financial instruments offsetting requirements and amended offsetting disclosures

Amendments to HKAS 32 "Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities" and HKFRS 7 "Financial Instruments : Disclosures - Offsetting Financial Assets and Financial Liabilities"

The Hong Kong Institute of Certified Public Accountants has issued amendments to HKAS 32 "Financial Instruments: Presentation" and HKFRS 7 "Financial Instruments: Disclosures" on 30th December, 2011 to clarify the accounting requirements for offsetting financial instruments and to introduce new disclosure requirements for offsetting financial instruments in order to enable users to evaluate the effect of netting arrangements on the entity's financial position.

The Amendments to HKFRS 7 are mandatory for annual accounting periods beginning on or after 1 January, 2013 while the Amendments to HKAS 32 are effective on or after 1 January, 2014. An entity shall apply the above amendments retrospectively and early adoption is permitted.

Key issues

The current principle in HKAS 32.42 requires an entity to offset financial assets and financial liabilities in the statement of financial position when, and only when the entity has a legally enforceable right to set-off the recognized amounts, and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

The amendments to HKAS 32 do not change these requirements but clarify that the right of off-set must not be contingent on a future event, and must be legally enforceable in the normal course of business as well as in the event of default, insolvency or bankruptcy of the entity and all of the counterparties. The amendments also clarify that if an entity can settle amounts in a manner such that the outcome is, in effect, equivalent to net settlement, the entity will meet the net settlement criterion in the standard. Hence, gross settlement mechanism has features that eliminate or result in insignificant credit and liquidity risk, and that will process receivables and payables in a single settlement process or cycle would satisfy the HKAS 32 criterion in this circumstance.

The Amendments to HKFRS 7 introduce new disclosure requirements for all recognized financial instruments that are set off in accordance with HKAS 32.42. These disclosures also apply to recognized financial instruments that are subject to enforceable master netting arrangement or similar agreement, irrespective of whether they are set off under HKAS 32.42.

To enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on the entity's financial position, the following quantitative information should be presented in tabular format, separately for financial assets and financial liabilities, unless another format is more appropriate.

(a) the gross amounts of those recognized financial assets and recognized financial liabilities;
(b) the amounts that are set off in accordance with HKAS 32.42 when determining 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 that are not otherwise included in (b) above, including:

(i) amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria; and
(ii) amounts related to financial collateral (including cash collateral); and

(e) the net amount after deducting the amounts in (d) from the amounts in (c) above.

An entity is also required to provide a description with respect to the rights of set-off of recognized financial instruments subject to an enforceable master netting arrangement or similar agreement in (d) above, including the nature of those rights.

Disclaimer:

The publication contains information in summary form and is therefore intended for general guidance only. This publication is not intended as legal, accounting or other professional advice and should not be relied upon as such. If legal, accounting or other professional advice or expert assistance is required, the services of a competent professional should be sought. Neither Lau & Au Yeung C.P.A. Limited nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication.