CFM16335b - Accounting for financial instruments: IAS 32 and IAS 39: when not to offset

When offsetting is inappropriate

Offsetting is usually inappropriate when:

1. several different financial instruments are used to emulate the features of a single financial instrument (a 'synthetic instrument');
2. financial assets and financial liabilities arise from financial instruments having the same primary risk exposure (e.g. assets and liabilities within a portfolio of forward contracts or other derivative instruments) but involve different counterparties;
3. financial or other assets are pledged as collateral for non-recourse financial liabilities;
4. financial assets are set aside in trust by a debtor for the purpose of discharging an obligation without those assets having been accepted by the creditor in settlement of the obligation (e.g. a sinking fund arrangement); or
5. obligations incurred as a result of events giving rise to losses are expected to be recovered from a third party by virtue of a claim made under an insurance policy.