Companies will be required to disclose additional information about financial instruments that have been, or may be, eligible for offsetting in the financial statements under guidance released by the Financial Accounting Standards Board (FASB) in Accounting Standards Update (ASU) 2011-11 Disclosures about Offsetting Assets and Liabilities. The ASU is a response to the differences in US and international standards for the net presentation of certain repurchase agreements, derivative arrangements, instruments subject to master netting agreements, and the related cash collateral. Although the new requirements apply to all companies, we expect that financial institutions will be most directly affected. This MHM Messenger was prepared by MHM’s Professional Standards Group to assist companies in applying the new guidance. It provides background on the convergence project, an explanation of how the changes may affect your company, and potential implications for future convergence projects.

1. February 2012
MHMMessenger
Updated November 2012
M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M
A publication of the Professional Standards Group
Disclosures about Offsetting Assets and Liabilities
Companies will be required to disclose additional on the adoption of IFRS in the US will be delayed,
information about financial instruments that have citing the inability to converge the accounting for
been, or may be, eligible for offsetting in the financial financial instruments as a significant reason for the
statements under guidance released by the Financial delay. At the center of the convergence debate for
Accounting Standards Board (FASB) in Accounting financial instruments has been the presentation and
Standards Update (ASU) 2011-11 Disclosures disclosure of financial instruments in which the right of
about Offsetting Assets and Liabilities. The ASU is a offset with a counter party exists. The FASB issued an
response to the differences in US and international Accounting Standards Update in January 2011, which
standards for the net presentation of certain repurchase was intended to converge the accounting for offsetting
agreements, derivative arrangements, instruments financial instruments together with the International
subject to master netting agreements, and the related Accounting Standard Board (IASB) (together Boards)
cash collateral. Although the new requirements apply by limiting the situations in which offsetting would be
to all companies, we expect that financial institutions acceptable to only those instances in which an entity
will be most directly affected. has an unconditional and legally enforceable right to
offset the financial asset and liability and also intends
This MHM Messenger was prepared by MHM’s to settle on a net basis (or realize the financial asset
Professional Standards Group to assist companies and liability at the same time). This decision would
in applying the new guidance. It provides background result in most financial instruments subject to master
on the convergence project, an explanation of how netting agreements being presented gross because
the changes may affect your company, and potential most such contracts contain only a conditional right
implications for future convergence projects. of offset. This would have resulted in a significant
change in the presentation of many derivative financial
Background instruments for US financial institutions and other
entities with large derivative portfolios.
Convergence between US generally accepted
accounting principles (US GAAP) and International However, in consideration of comments received,
Financial Reporting Standards (IFRS) in the accounting the FASB decided to retain the current standards
for financial instruments has been a subject of much for offsetting, thus allowing entities to offset financial
debate. The Securities and Exchange Commission instruments even if only a conditional right of offset
(SEC) announced in December 2011 their decision exists. The IFRS largely retained the guidance in the
original joint project. The result is a lack of convergence
as there will be more circumstances in which offsetting
financial instruments is allowed under US GAAP as
compared to IFRS. Rather than full convergence,
the FASB and IASB added a joint project to address
our roots run deep TM (Continued on Page 2)
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2. MHMMessenger
(Continued from Page 1)
the disclosures for financial instruments that qualify (b) Financial instruments that are only subject to a
for offset as well as those subject to master netting collateral agreement (including those in which the
agreements (or similar arrangements) with a goal of collateral is a non-financial asset).
providing sufficient disclosures such that users will be
able to compare financial statements prepared under What disclosures are required?
US GAAP to those prepared in accordance with IFRS.
The disclosure project was finalized by the Boards in The ASU requires disclosure of a description of the
December 2011. rights of setoff associated with recognized assets and
liabilities subject to an enforceable master netting
How the Changes May Affect You agreement or similar arrangement. It also requires
a tabular presentation (unless another format is
The significant disclosure requirements are more appropriate) of the following information for
summarized below. instruments within its scope, shown separately for
assets and liabilities and grouped by type (such as
Which financial instruments are included? derivatives, repurchase agreements, etc.) or partly by
(See Note 1) type for items (a) through (c) and partly by counterparty
(such as Counterparty A, Counterparty B, etc.) for (c)
The ASU establishes disclosure requirements for all through (d):
financial instruments that are eligible for offsetting,
however it does not change the evaluation criteria for (a) The gross amounts of the recognized assets
offsetting under US GAAP. Financial instruments and and liabilities.
transactions that are included in the scope of the ASU
generally consist of derivatives, sale and repurchase (b) The amounts offset in accordance with the
agreements, and securities borrowing and securities guidance in Sections 210-20-45 and 815-10-45
lending arrangements that are eligible for offset under to determine the net amounts presented in the
current US GAAP. The scope of the ASU also includes statement of financial position.
enforceable master netting agreements or similar
arrangements, regardless of whether the entity has (c) The net amounts presented in the statement of
elected to recognize the financial instruments on a financial position.
net basis, along with any related rights to financial
collateral. Examples of other arrangements included (d) The amounts subject to an enforceable master
within the disclosure requirements of the ASU include netting arrangement or similar agreement not
derivative clearing agreements, global master otherwise included in (b). These disclosures should
repurchase agreements, and global master securities include amounts related to recognized financial
lending agreements. instruments and other derivative instruments that
management makes an accounting policy election
Financial instruments excluded from the scope of the not to offset (or that do not meet some or all the
ASU include: guidance for offsetting) and amounts related to
financial collateral.
(a) Loans and customer deposits at the same
institution (unless they are offset in the statement (e) The net amount after deducting the amounts in
of financial position), and (d) from the amounts in (c).
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3. MHMMessenger
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What is the effective date? The acceptance of common disclosure requirements
signals that the Boards are willing to compromise on
The disclosures are required for fiscal years beginning a middle-ground, “building-block” approach that will
on or after January 1, 2013 and interim periods facilitate comparisons by providing users with the
within those annual periods. Upon adoption, the information needed to reconcile the differences instead
disclosures should be applied retrospectively for any of eliminating the differences altogether. It remains
period presented that begins before the date of initial to be seen how often the building-block approach
application of the guidance. will be used in future convergence projects, but this
new approach may well open the door for other joint
Any implementation advice? projects as well.
Companies should become familiar with the disclosure For More Information
requirements in order to provide sufficient time for any
systems or process changes that may be needed to If you would like additional information about the new
compile the required information in time for adoption. requirements for disclosures on offsetting, or if you
Some of the disclosure requirements may overlap have any specific questions, comments or concerns
with information required by existing standards. about adopting the ASU, please contact Mike Loritz
For example, Accounting Standards Codification of MHM’s Professional Standards Group or your
Topic 815, Derivatives and Hedging, requires similar MHM service professional. You can reach Mike
disclosures for derivative instruments, including gross directly by email at mloritz@cbiz.com or by phone at
positions held and related collateral and exposures to 913-234-1226.
credit risk. However, the disclosures required by ASU
2011-11 are more broad and may require aggregation
of additional information. November 2012 Update
Significance for Future Accounting Standards Note 1: Questions have arisen about the
applicability of ASU 2011-11 to: (1) trade
The decision to achieve comparability of US GAAP payables and trade receivables and (2)
and IFRS through the use of common disclosures unsettled regular way trades. In October
rather than full convergence sets important precedent 2012, the FASB tentatively decided to issue a
because it represents a significant departure from the separate ASU to clarify whether these items
Boards’ initial objective of facilitating comparisons of are excluded from the scope of ASU 2011-
companies that use US GAAP with those that use 11. An exposure draft of the proposed scope
IFRS by eliminating differences between US GAAP clarification is expected in November 2012.
and IFRS. MHM is monitoring the deliberations and
will issue a separate Messenger when the
proposed clarification is available.
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM service provider to further discuss the impact on your financial statements.
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