Offsetting or Setting off?
To be honest, I was not sure how to approach this topic. First, I wanted this to be a technical blog, but then I also wanted to make it a bit less dry. In a nutshell, it’s only about one sentence on one page of a 70+ pages long document, but it’s quintessential to what a reporting system is designed to do. It’s a simple statement which can be further reduced to the simple ‘DO NOT’, and most readers will probably stop right here as they wouldn’t find in it anything pertinent to what they do or are interested in doing. But for those who like context and background I will try explaining how it relates to all what ERP is doing, at least in my book. So, here’s the full sentence:
An entity shall not offset assets and liabilities unless specifically required or permitted.
Somewhere on Page 5 (links to FASB and IASB documents are provided below, but I’m referencing the FASB document for the sake of simplicity) you can read that “netting is (…) the single largest quantitative difference in the amounts presented in statements”. So, what you owe in country A is not as much or as little as what you owe in country B or vice versa to put it in the most simplistic terms and to not pick on any country.
Digging a bit deeper, we can refer to the original documents. Here is how FASB talks with IASB about offsets. The statement above can be found on page 10 (or 6 if we follow internal numbering) of this FASB document, but not exactly anywhere when “converging” into this IFRS document.
The full official and legal description of the standard takes a bit more space, but it doesn’t really add anything new:
1. On the basis of the rights and obligations associated with the eligible asset and eligible liability, the entity has, in effect, a right to or obligation for only the net amount (that is, the entity has, in effect, a single net eligible asset or eligible liability)
2. The amount, resulting from offsetting the eligible asset and eligible liability, reflects an entity’s expected future cash flows from settling two or more separate eligible instruments.
(Page 6 of FASB document).
Here are some more excerpts that elaborate on the key statement above.
When converging with IASB, we can find this reference: IAS 39, Financial Instruments: Recognition and Measurement, and would establish a common approach for presentation of such instruments (Page 7 of IASB document).
Going back to the domestic standard: In U.S. GAAP, a principle would be established that would preclude offsetting, unless specifically required or permitted by a specific Topic, similar to the principle that exists in IFRSs (Page 7 of FASB document).
Everything else is mostly an invitation to comment and an explanation how this new rule would fit into the rest of standards and taxonomies.
Point of Reference
“What’s the big deal?” you might ask, so let me explain a little bit more. Some of you may be aware of the slow and painful process of adopting international accounting standards in the US, i.e. so called “Norwalk Agreement” or what I would like to call “When FASB met IFRSs”. Offsetting is one of the most recent Accounting Topics (210 to be exact) that has been taken up on both sides of the Atlantic to resolve accounting standards issues (once and for all?).
I know, we have tried Sarbanes-Oxley a few years back, but that was before the bailout and guess what, the crisis happened again (starting sometime in the fall of 2008). The not-so-pretty assets were swept under the carpet (plugged?) under the guise of a Repo (rhymes nicely with “Hippo”, doesn’t it?) Some more background and the very legal answers can be found in this Lehman document. In it, if you cross search for Repo you will find some similarities to the accounting topic of offsetting. Without this background, the proposed standards seems very innocuous, but what I see is that something that has alreadt happened, and what was done in the normal course of business previously, shall now be banned. We don’t know for sure, but we will start seeing some answers and comments for and against it before the April 28 deadline.
What does it all mean and why write about it here? The way I look at it is that there are some areas in common, but at some point, the accounting standards go separate ways. For FASB, it’s their newly found focus on accounting codification of topics and XBRL and for IFRS it’s how this new standard would fit with the rest of IFRSs and the number of countries that have adopted the standard. What’s missing from both documents and what it is only slightly alluded to is why this has become a top priority for both boards to consider.
If you need to attach value to this question I would suggest USD750B or EUR750B or both. This is how much has been pumped into G20 economies to salvage the financial system that is relying on accounting standards and whose members have to implement one (read SAP) and many (read Excel) other financial data reporting tools to communicate to the investors at large how financially sound they are for (P&L) and at (BS) given points in time.
Since your eyes are probably glazed over by now but you are still reading, I will add more. All transactions in ERP eventually result in balances in your production system general ledger and when transferred to BI become an internal financial statement, which when published in internet will most probably utilize XBRL (a derivative of XML).
With mobile computing spreading into more and more smartphones and tablets those statements will make their way right into your pocket after you have spent money from your pocket to have the right to see them as soon as possible after the close and ask question (tweets?) about it. Consequently, you will be either buying or selling investments based on those financial statements. Most of the time, you won’t be even looking at financial statements as they have been written by lawyers and accountants (er, attorneys and CPAs) and are incomprehensible to an average investor. I like to compare them to the ABAP code. Makes sense to SAP professionals but not necessarily to the end users.
Why should you care? Here’s my take on it. You are in the middle of the upgrade of the CRM or SRM and have to size your hardware requirements and now this comes along and you probably think that finance should take care of it. Well, they might, but they will need some help from “technical” people to guide them through. Looking from a different angle, all 79 pages of the Exposure Draft are now your requirements and you are the project manager whose bonus depends from the successful implementation of offsetting in your production environment.
To answer the question posted at the beginning, for accountants offsetting and setting off means exactly the same or your debit used to be a credit and your credit used to be a debit, but they have been reversed (storned) or canceled. Did I confuse anybody yet?