The FRC has regularly identified material errors in relation to offsetting, despite requirements being reasonably well established. This was laid out in a recent thematic review on offsetting, alongside one on IFRS 17 disclosures.

The impact of these material errors can be significant, potentially masking the full extent of the risks relating to the company’s income and expense, assets and liabilities, or cash flows.

The thematic reviews outline its findings following a review of disclosures in companies’ first annual reports and accounts following their adoption of IFRS 17, and reflections on the quality of offsetting in the financial statements.

The FRC’s report on offsetting in the financial statements focuses on the areas where the regulator finds the most frequent application issues, including the cashflow statement, financial instruments and provisions. The report highlights examples of good practice, areas where reporting could be improved, and details topical case studies.

Good practice for offsetting

Preparers are reminded that:

• cash flows should be presented gross, unless otherwise required or permitted;
• bank overdrafts and positive bank balances that form part of a cash pooling arrangement are offset in the statement of financial position only when there is an intention to exercise a legally enforceable right to set off period-end bank balances;
• high quality disclosures are important where financial instruments have been offset or are subject to a master netting arrangement or similar agreement; and
• a reimbursement asset is required to be separately presented from the associated provision. Any reimbursement rights that satisfy the contingent asset requirements of IAS 37 should also be appropriately disclosed.

The report does not consider the application of requirements by banks and insurers, noting that the quality of reporting in these sectors is usually high.

Positive start to IFRS 17 disclosures

In contrast to its review of offsetting in the financial statements, the FRC found in its review of IFRS 17 disclosures that the overall quality was good.

Some areas of improvement were identified, although many of these relate to issues that are commonly identified in the FRC’s routine reviews, such as judgements and estimates and alternative performance measures (APMs).

The FRC acknowledges that IFRS 17 is a new standard, and that practice will continue to develop over time. The regulator stated in its report that it is therefore careful to take a proportionate approach to allow companies to consider fully how best to disclose the required information.

“The thematic reviews are a useful reminder of the requirements relating to offsetting and the disclosure of insurance contracts, and provide helpful examples of what good practice looks like” says Georgina Chalk, Technical Manager in ICAEW’s Corporate Reporting Faculty.

“It is also encouraging to read that the quality of IFRS 17 disclosures reviewed was good and that the significant effort that has gone into the transition to IFRS 17 has resulted in a high level of compliance with the standard.”

Read the reports

FRC's thematic reviews are aimed at helping preparers, auditors and investors to better understand the relevant reporting requirements. You can read them in full:

• Offsetting
• IFRS 17 adoption