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Complying With the New Balance Sheet Offsetting Disclosure Requirements

10 considerations for asset managers


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Complying with the new disclosure requirements may present operational and technical challenges for asset managers. Such challenges may include the following:

  1. Data gathering — Investment companies may have a variety of data-tracking systems, especially if they use multiple service providers or different subadvisers. Such companies may also hold instruments that qualify for offsetting that they elect to present gross in the statement of financial position. Because they would not have done so already, they may need to expend considerable effort gathering information related to these instruments to comply with the new disclosure requirements.
  2. Ongoing tracking — Investment companies’ current financial reporting systems might not be equipped to closely track, on an ongoing basis, information about rights of setoff for instruments within the scope of the amended guidance that are executed under MNAs or similar agreements. Because of the frequency with which they will need to update and disclose such information under the new requirements, companies must ensure that their financial reporting infrastructure allows them to adequately monitor and analyze this information.
  3. Determining collateral value — Many organizations have uniform pricing policies for their financial reporting. However, a valuation determination made by using a company’s collateral management systems may not incorporate those uniform pricing policies. The amended guidance requires disclosure of amounts related to financial collateral (including cash collateral). Therefore, when financial statements are produced, investment companies should ensure that the collateral is appropriately valued.
  4. Additional time and resources — Personnel in fund reporting departments will need to familiarize themselves with the new disclosure requirements. Further, additional resources may be necessary because more information will need to be given to the independent auditor than under previous guidance.
  5. Potential legal analysis — Fund accounting personnel may not have the legal expertise needed to determine whether financial instruments are subject to an enforceable MNA (or similar arrangement).
  6. Master clearing agreements — ASC 210-20-50-1(d) states that recognized derivative instruments accounted for in accordance with ASC 815 that are “subject to an enforceable [MNA] or similar agreement” are subject to the disclosure requirements, regardless of whether they are actually offset in the statement of financial position. Investment companies and their advisers should analyze the features and provisions of their master clearing agreements (and other arrangements that cover instruments within the scope of the amended guidance) to determine whether those agreements are similar to an MNA and whether they are enforceable. Exchange-cleared contracts that are subject to a clearing agreement that is determined to be enforceable and similar to an MNA would be within the scope of the offsetting disclosure requirements.
  7. One-sided MNAs — In preparing their disclosures, investment companies should consider whether their MNAs are “one sided.” In a one-sided MNA, the counterparty rather than the reporting entity has the right of offset upon default and the reporting entity lacks a mirror right. From the perspective of the reporting entity, because such arrangements are not MNAs, instruments subject to the arrangement would not be within the scope of the disclosure requirements unless they are actually offset in the balance sheet in accordance with either ASC 210-20-45 or ASC 815-10-45.
  8. Qualitative disclosures — ASC 210-20-55-17 states that to enable financial statement users to determine the effect of netting arrangements on a company’s financial statements, an “entity may need to supplement [its] disclosures with additional (qualitative) disclosures depending on the terms of the enforceable [MNAs] and related agreements, including the nature of the rights of setoff and their effect or potential effect on the entity’s financial position.” Companies that use multiple counterparties and have multiple MNAs (1) will need to consider that the MNAs may have been drafted at different times on the basis of various risks and legal environments and (2) should understand the differences between these agreements.
  9. Internal controls — Investment companies may need to adjust their controls in connection with systems, data gathering and ongoing tracking, as well as their reviews of such controls.
  10. Interaction with other U.S. GAAP — Other U.S. GAAP provisions require investment companies to disclose information about certain amounts offset in the statement of financial position as well as information about (1) related collateral (pledged or received) and (2) exposures to credit risk. Although those provisions may require the disclosure of similar information, investment companies should not assume that they have satisfied the disclosure requirements under the amended offsetting guidance because there may be differences in scope.

To learn more about the disclosure requirements, download the summary.

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