Balance sheet offsetting is permitted when a right of setoff exists and certain criteria are met.
ASC 210-20-45-1 provides guidance on the right of setoff of all balances. The right of setoff for derivatives and repurchase/reverse repurchase and stock lending agreements are subject to different offsetting requirements as discussed in FSP 19 and FSP 22, respectively.
ASC 210-20-45-1 lists four criteria that determine whether a right of setoff exists. If all four criteria are met, the reporting entity may present the asset and liability as a net amount on the balance sheet.
A right of setoff exists when all of the following conditions are met:
- Each of two parties owes the other determinable amounts.
- The reporting party has the right to set off the amount owed with the amount owed by the other party.
- The reporting party intends to set off.
- The right of setoff is enforceable at law.
Three of these criteria are objectively determinable. An asset and liability should be offset under a legal right of setoff only when they represent amounts due to and from the same party.In addition, areporting entity should consider discussion with its legal counsel to evaluate legal enforceability of setoff rights.
In assessing whether amounts qualify for net reporting, determining the intent of the reporting party may require judgment. ASC 210-20-45-5 notes that historical precedent is an indicator to consider in evaluating intent of the reporting entity. If the reporting entity has executed a settlement by offsetting balances with the other party in prior transactions, it may be appropriate to expect a similar offset in the future, provided the reporting entity asserts its intention to offset the balances. Generally, a reporting entity cannot present an asset and liability with another party net if the reporting entity does not intend to offset, even if all other criteria are met.The ASC 210-20 offsetting guidance relates to presentation only; its scope does not extend to derecognition of assets and liabilities. For example, presenting an asset and liability of equal value net on the balance sheet does not result in the derecognition of the contractual right and obligation. Therefore, reporting entities should include the gross amounts in disclosure, despite the amounts being all or partially eliminated from presentation on the balance sheet. Further, the offsetting guidance does not permit a reporting entity to record or disclose that debt or a note payable has been extinguished through the presence of a debt service fund or similar collateral arrangement.
