Offsetting and netting agreements

Banks' derivative books are enormous gross but much smaller net, because trades with the same counterparty offset under netting agreements. Whether that netting can be shown on the balance sheet changes total assets and leverage significantly. This guide explains the IAS 32 conditions, why most derivatives stay gross, the cases that do qualify, and the IFRS 7 netting table.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 3 minute read.

Short answer

Offsetting financial instruments is allowed under IAS 32 only when a bank currently has a legally enforceable right to set off the recognised amounts and intends to settle net or simultaneously. Master netting agreements, such as the ISDA agreements banks use for derivatives, usually give a right of set-off only on default, so the derivatives stay gross on the balance sheet, but IFRS 7 requires a table showing the effect of netting and collateral. In this guide's example, derivative assets of 800 and liabilities of 600 with one counterparty, plus 150 of collateral, leave a net exposure of 50.

At a glance

Condition 1
Legally enforceable right of set-off now
Condition 2
Intention to settle net or simultaneously
Master netting agreements
Usually set-off on default only
Result for most derivatives
Presented gross
Often netted
Some repos and cleared trades
Disclosure
IFRS 7 offsetting table
Offsetting and netting agreementsCondition 1: Legally enforceable right of set-off now; Condition 2: Intention to settle net or simultaneously; Master netting agreements: Usually set-off on default only; Result for most derivatives: Presented gross; Often netted: Some repos and cleared trades; Disclosure: IFRS 7 offsetting table.KEY FACTS AT A GLANCEOffsetting and netting agreementsCondition 1Legally enforceable rightof set-off nowCondition 2Intention to settle netor simultaneouslyMaster netting agreementsUsually set-off ondefault onlyResult for most derivativesPresented grossOften nettedSome repos and clearedtradesDisclosureIFRS 7 offsetting tableTax BakersOffsetting and netting agreementsCondition 1: Legally enforceable right of set-off now; Condition 2: Intention to settle net or simultaneously; Master netting agreements: Usually set-off on default only; Result for most derivatives: Presented gross; Often netted: Some repos and cleared trades; Disclosure: IFRS 7 offsetting table.KEY FACTS AT A GLANCEOffsetting and netting agreementsCondition 1Legally enforceable right of set-off nowCondition 2Intention to settle net or simultaneouslyMaster netting agreementsUsually set-off on default onlyResult for most derivativesPresented grossOften nettedSome repos and cleared tradesDisclosureIFRS 7 offsetting tableTax Bakers
Key facts at a glance, as set out in this guide.

An offsetting example with one counterparty

A bank has derivatives with one counterparty under an ISDA master netting agreement: assets with a positive fair value of 800 and liabilities of 600. It holds 150 of cash collateral from the counterparty. The agreement allows set-off only if one party defaults.

Derivative exposure to one counterpartyDerivative exposure to one counterparty800Grossassets-600Liabilitiesunder netting-150Cash collateralreceived50Netexposure
The balance sheet shows the gross amount; the disclosure shows the net exposure.
IFRS 7 offsetting table, derivative assetsAmount
Gross amount of recognised assets800
Amounts offset in the balance sheet0
Net amount presented in the balance sheet800
Related amounts not offset: financial instruments(600)
Related amounts not offset: cash collateral received(150)
Net amount50

The balance sheet shows 800 of assets and 600 of liabilities, because the right of set-off is not currently enforceable in the normal course of business. The table shows readers that the economic exposure is only 50.

Offsetting financial instruments: when is it allowed?

  • A legally enforceable right of set-off, currently: enforceable in the normal course of business and in default, insolvency or bankruptcy of the bank and all counterparties. A right that exists only on default does not meet this condition.
  • An intention of net settlement, or to realise the asset and settle the liability simultaneously.

Simultaneous settlement through a clearing system that eliminates credit and liquidity risk and processes receivables and payables in a single process can meet the second condition even when settlement is gross.

Which bank positions often qualify?

  • Repurchase and reverse repurchase agreements with the same counterparty, settled through the same clearing system on the same date.
  • Centrally cleared derivatives where daily variation margin is treated as settlement, so the remaining balances are small by construction.
  • Cash pooling arrangements where the bank has a right of set-off and balances are swept regularly, so that physical net settlement actually happens.

How is collateral accounted for?

Cash collateral received under a credit support annex is recognised as an asset with a matching liability to return it; cash collateral posted is a receivable. Securities received as collateral are not recognised unless the bank sells them or the counterparty defaults. In the IFRS 7 table, collateral reduces the net exposure, capped so that it never takes the net amount below zero for any counterparty.

Why does offsetting matter for banks?

Gross presentation inflates total assets, which affects leverage ratios and comparisons with US banks. US GAAP allows derivatives under master netting agreements to be offset, along with related cash collateral, so US banks' balance sheets look much smaller for the same activity. Analysts often adjust for this when comparing IFRS and US banks: in the example above, an IFRS bank shows 800 of derivative assets where a US bank could show 50 after netting and collateral.

For IFRS banks, gross presentation also means that the derivative lines in the balance sheet can be among the largest items, even when the bank's net market risk on them is quite small.

What must be disclosed?

IFRS 7 requires the offsetting table for recognised financial instruments that are offset or subject to an enforceable master netting arrangement, whether or not they are offset, by type of instrument or by counterparty. See fair value levels, bank accounting and bank hedge accounting.

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Questions people ask

When can financial assets and liabilities be offset under IAS 32?

Only when there is a currently legally enforceable right of set-off and an intention to settle net or simultaneously.

Are derivatives under ISDA master netting agreements offset?

Usually not under IFRS, because the right of set-off applies only on default; they are presented gross with an IFRS 7 offsetting table.

Which bank positions are often offset?

Repos and reverse repos with the same counterparty settled through a clearing system, and some centrally cleared derivatives.

Why do US banks show smaller derivative balances?

US GAAP allows derivatives under master netting agreements, and related cash collateral, to be offset.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 32 Financial Instruments: Presentation

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

BankingFair value levels in bank accountsBankingBank accounting: the key IFRS issuesBankingHedge accounting for banks' interest rate risk

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This guide is general information. It is not tax or legal advice for your situation.