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

© 2013 KPMG IFRG Limited, a UK company, limited by guarantee. 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

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (‘KPMG International’), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/first-impressions/Pages/first-impressions-offsetting.aspxhttp://www.kpmg.com/ifrs

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?