Enquiry:

Please advise if trade receivables are netted with advances from customers and reported as a single net balance in prior year because it pertains to two different branches of same customer and customer used to pay on branch behalf and sometimes branches pays themselves (they have legally enforceable right to setoff) and in current year these are reported separately as an asset and liability on the balance sheet and consequently comparative figures have been restated/ reclassified. In the prior year the amount was off-set as:

a) the customer paid extra amount at one branch to settle amount owed by them at another branch.
b) the net credit balance from the customer, if any, was presented as a liability.
c) advance amount (if a receivable of equal or more exists with another branch) did not entitle the customer to further goods. Further, customer is only entitled to future supply of good for net credit balance only.

Please advise whether the change in presentation is a reclassification or not? It involves material amounts and also offsetting of assets and liabilities last time was in accordance with IFRS. As affirmative reply means reclassification disclosure has to be presented (if material).

Opinion:

In context of the information submitted by the enquirer, we understand that the company settled the trade receivable and customer advance balances on a net basis. Consequently, the amount of net receivable is a financial asset, while any net credit balance, being a customer advance, is a financial liability as cash will be refunded to customer.

In accordance with IAS 1, Presentation of Financial Statements, the assets and liabilities can be offset, if permitted or required by International Financial Reporting Standard.

Offsetting, in accounting, is the presentation of financial assets and financial liabilities on a net basis in the financial statements. The offsetting of financial instruments is required under IAS 32, Financial Instruments: Presentation, and the underlying principle outlined in paragraph 42 of IAS 32 is mentioned below: (Emphasis is ours)

“A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, and only when, an entity:
(a) currently has a legally enforceable right to set off the recognised amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.”

Further, Paragraph 43 of IAS 32, clarifies that “When an entity has the right to receive or pay a single net amount and intends to do so, it has, in effect, only a single financial asset or financial liability”. (Emphasis is ours)

In view of the above discussion, offsetting is required when there is both a right and intention to offset because doing so reflects an entity’s expected future cash flows from settling two or more financial instruments. The view is that offsetting in such situations, in effect, represents in the balance sheet that the entity has a single financial asset or financial liability. In other circumstances and conditions, the financial assets and liabilities are presented separately at their gross amounts in accordance with their characteristics as resources or obligations of the entity.

IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, defines accounting policies as specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Further, the change in accounting policy requires restatement. However, application of accounting policy for new transactions, events or conditions that differ in substance from those previously occurring is not a change in the accounting policy.

IAS 1, Presentation of Financial Statements, requires consistent presentation and classification of items in the financial statements from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS. Further, the entity shall reclassify the comparative amounts in case of change in the presentation or classification of items, unless reclassification is impracticable.

Based on the information contained in the enquiry, the Committee understands that off-setting of financial assets (trade debtor) and financial liability (customer advance) relating to the same counter party, in the prior period/s, must be on the basis of the above principle of IAS 32. Any change in the presentation can only be made if there is change in the terms and conditions which don’t meet the off-setting criteria discussed in the preceding paragraphs.

(March 27, 2017)