10 september 2024 Judy Pink Corporate Governance

FRC sets out expectations for offsetting in the financial statements

The Financial Reporting Council has published a thematic review on the quality of reporting in respect of offsetting in the financial statements.

What is offsetting?

Offsetting (also known as 'netting') involves presenting items that would otherwise be shown separately as a single net amount. International Financial Reporting Standards permit or require offsetting only in specific situations.

Thematic review

The FRC regularly identifies material errors in the use of offsetting through its routine monitoring work. The review sets out the most common issues, particularly in the areas of the cash flow statement, financial instruments and provisions, and provides examples of good disclosures.

The review concludes with a helpful summary of the FRC's expectations in relation to offsetting disclosures. In particular, companies should:

  • disclose material accounting policy information relating to offsetting, ensuring all relevant aspects of any offsetting conditions are included;
  • disclose significant judgements made in relation to offsetting income and expenses, assets and liabilities or cash inflows and outflows;
  • present cash inflows and outflows within investing and financing activities on a gross basis in the cash flow statement, except in limited cases where netting is either required or permitted;
  • consider whether to exclude overdrafts from cash and cash equivalents in the cash flow statement when the overdrafts remain overdrawn over several reporting periods;
  • consider the terms and conditions of cash pooling arrangements when determining whether to offset positive bank balances and overdrafts that form part of the arrangement. These should only be offset in the statement of financial position when there is an intention to exercise a legally enforceable right to set off period-end bank balances;
  • provide high quality offsetting disclosures where financial instruments have been offset, or form part of a master netting arrangement or similar agreement;
  • present a reimbursement asset separately from the associated provision. Any reimbursement rights that satisfy the contingent asset requirements of IAS 37 should be appropriately disclosed.

The thematic review on offsetting can be found here.