GROSS VERSUS NET BALANCE SHEET PRESENTATION OF OFFSETTING DERIVATIVES ASSETS AND LIABILITIES

57 Pages Posted: 12 Jun 2020 Last revised: 22 Nov 2021

See all articles by Stephen G. Ryan

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Barbara Seitz

Nordea Group

Date Written: November 17, 2021

Abstract

Accounting principles state that the net presentation of offsetting assets and liabilities on the balance sheet is improper unless the right of setoff exists. Derivatives dealers and their frequent counterparties engage in master netting agreements (MNAs) that provide a limited right of setoff that is insufficient (sufficient) for net presentation under IFRS (US GAAP). To remedy this presentation difference, as of 2013, IFRS and US GAAP require dealers to disclose the gross, reported, and net amounts of derivatives assets and liabilities that they present net or present gross but cover under enforceable MNAs.
We first study real effects of these mandatory disclosures on dealers’ financial leverage. We posit that dealers prefer market participants to view their leverage as lower. Because the 2013 requirements provide new information for IFRS dealers but not for US GAAP dealers, we hypothesize and provide evidence that the requirements induce IFRS dealers to reduce their derivatives leverage by eliminating unnecessary offsetting derivatives and using MNAs more effectively. We then study the usefulness of the disclosures to market participants. Because the right of setoff provided by MNAs does not eliminate all significant risks of the covered derivatives, we hypothesize and provide evidence that dealers’ net derivatives leverage and disclosure quality under the 2013 requirements inform market participants about dealers’ credit risk uncertainty.

Keywords: Derivatives; dealers; master netting agreements; gross versus net balance sheet presentation; disclosure; real effects; credit risk uncertainty.

JEL Classification: G130, G21, M41

Suggested Citation

Ryan, Stephen G. and Seitz, Barbara, GROSS VERSUS NET BALANCE SHEET PRESENTATION OF OFFSETTING DERIVATIVES ASSETS AND LIABILITIES (November 17, 2021). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3604343 or http://dx.doi.org/10.2139/ssrn.3604343

Stephen G. Ryan (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

Barbara Seitz

Nordea Group ( email )

Copenhagen
Denmark
29122993 (Phone)

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