Unable to agree on whether companies should present their derivative contracts covered by master netting agreements as gross or net positions, accounting rule makers have instead agreed to require disclosures aimed at helping investors sort out the difference.

The Financial Accounting Standards Board has issued Accounting Standards Update No. 2011-11 to add new disclosure requirements intended to help users of financial statements understand the effect of offsetting arrangements on a company's financial position. The International Accounting Standards Board issued essentially the same requirements for International Financial Reporting Requirements as an amendment to IFRS 7.

Under U.S. Generally Accepted Accounting Principles, companies are permitted to present derivatives on a net basis when they meet the right criteria, most notably where they are subject to a legally enforceable netting arrangement with the same party and where the rights of set-off are only available under default or bankruptcy. Under IFRS, however, no such option is permitted, requiring companies to show those positions on a gross basis.

The boards issued proposals in January 2011 to narrow the criteria for when netting might be permitted in an effort to converge the accounting rules, but both boards decided ultimately after feedback from their respective constituents to retain their current accounting. FASB heard complaints that a more limited allowance for netting assets and liabilities would have led to a significant increased in total assets and liabilities for a handful of big financial institutions, affecting key balance sheet metrics.

Instead, they agreed on new disclosure requirements that are intended to enable investors to compare financial statements prepared under GAAP and IFRS. The boards say the new disclosure requirements will illuminate how companies mitigate credit risk, especially around any collateral that is pledged or received. FASB Chairman Leslie Seidman said in a statement the expanded disclosures are responsive to investor feedback. IASB Chairman Hans Hoogervorst said in the same statement that the disclosures will bridge differences by they represent “plan B” for both boards.

The new requirements will take effect for annual reporting periods beginning on or after Jan. 1, 2013, as well as each interim period within the first annual period.

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