Corporate Financial Reporting · Accounting of Financial Instruments

Ind AS 107 Disclosures and Offsetting of Financial Instruments

Updated 11 October 2026 · Fact-checked

Ind AS 32 allows a financial asset and liability to be shown net only if you have a legally enforceable right to set off and intend to settle net or simultaneously. Ind AS 107 then requires disclosures on offsetting and on credit, liquidity and market risk. Test the two offsetting conditions first, then pick the disclosures.

Understand Presentation and Disclosure (Ind AS 107)

Financial statements must show what an entity owes, what it is owed, and what risks sit behind those balances. Ind AS 32 deals with presentation. Ind AS 107 deals with disclosure. Ind AS 109 deals with recognition and measurement. The three work together.

Offsetting means showing a financial asset and a financial liability as one net figure. This is allowed only when net presentation reflects your expected future cash flows. If you have the right to receive or pay a single net amount and you intend to do so, you effectively have one asset or one liability. In other cases, show them separately, as resources and obligations.

The legal right alone is not enough. Ind AS 32 says that without an intention to exercise the right or to settle simultaneously, the amount and timing of future cash flows are not affected. The reverse also fails: an intention to settle net without a legal right to do so does not justify offsetting, because the rights and obligations stay unchanged.

Simultaneous settlement matters because settling separately exposes you to credit risk on the full asset or liquidity risk on the full liability, even if only briefly. So realisation and settlement are treated as simultaneous only when they occur at the same moment. A clearing house in an organised market is a typical case where cash flows equal a single net amount.

On disclosure, Ind AS 107 supplements other requirements. Its offsetting disclosures apply to recognised instruments that are set off under Ind AS 32. They also apply to instruments under an enforceable master netting arrangement or similar agreement, whether or not they are actually set off. Beyond offsetting, the standard asks for information on the risks arising from financial instruments, namely credit, liquidity and market risk, so users can judge their significance.

Key rules to remember

Offsetting test (Ind AS 32): Offset only if: (1) legally enforceable right to set off AND (2) intention to settle net OR realise asset and settle liability simultaneously; Both parts are needed. A right alone, or an intention alone, is not enough (para 46).
Simultaneous settlement: Treated as simultaneous only when transactions occur at the same moment; Para 48. Short delays create credit or liquidity exposure, so net presentation fails.
Scope of offsetting disclosures: Ind AS 107 paras 13B–13E apply to: instruments set off under Ind AS 32 para 42 + instruments under an enforceable master netting arrangement or similar agreement; Master netting instruments are covered even if not set off (paras 13A, B40).
Liquidity risk definition: Risk of difficulty in meeting obligations on financial liabilities settled by delivering cash or another financial asset; From Appendix A of Ind AS 107.
Measurement differences in offsetting disclosure: Show instruments at recognised amounts and describe measurement differences; Para B42. Example: a repo payable at amortised cost against a derivative at fair value.

How to solve Presentation and Disclosure (Ind AS 107) questions

Use this order for any question on offsetting or financial instrument disclosures.

1Identify the two instruments and the counterparty. Offsetting normally needs the same counterparty.
2Check for a legally enforceable right to set off. Read the facts for contracts, netting agreements and whether the right survives default or insolvency.
3Check intention: does the entity intend to settle net, or to realise the asset and settle the liability at the same moment?
4If both tests pass, present the net amount. If either fails, present gross, and say why.
5Check whether a master netting arrangement exists. If so, the Ind AS 107 offsetting disclosures apply even without net presentation.
6Prepare the disclosure: gross amounts, amounts set off, net amount presented, and related collateral or netting amounts not set off. Mention measurement differences.
7For risk disclosures, classify the exposure as credit, liquidity or market risk and state what the question asks: nature, exposure and how it is managed.
8Write a one-line conclusion citing the standard.

Quickest way: Two-test offsetting check

When to use it: Use for short MCQs and case scenarios that ask whether balances can be netted.

Ask: is there a legal right to set off today?
Ask: is there intention to settle net or at the same moment?
Both yes: net. Any no: gross.
If a master netting agreement exists, add the disclosure even when gross.

Common mistakes in Presentation and Disclosure (Ind AS 107)

Offsetting because a legal right exists.
Students treat the right as the whole test.
Fix: Also confirm intention to settle net or simultaneously. Para 46 says the right alone is not sufficient.
Offsetting because the parties intend to settle net, without a legal right.
Commercial practice looks like netting.
Fix: Intention without a legal right does not justify offsetting; the individual rights and obligations remain unaltered.
Treating settlement a few days apart as simultaneous.
The gap seems trivial.
Fix: Para 48 says simultaneous means the same moment. Even brief gaps carry credit or liquidity exposure.
Skipping disclosures when items are not offset.
Students link disclosure only to actual set-off.
Fix: Disclosures also apply to instruments under an enforceable master netting arrangement or similar agreement, whether or not set off.
Mixing up credit, liquidity and market risk.
The terms sound similar.
Fix: Liquidity risk is difficulty meeting liabilities settled in cash or another financial asset. Credit risk is counterparty failure. Market risk is value change from market prices.

Worked examples

Example 1

Aarav Traders Ltd has a receivable of ₹8,00,000 from Bharat Steels Ltd and a payable of ₹5,00,000 to the same company. A contract gives Aarav a legally enforceable right to set off. Aarav intends to settle the net amount of ₹3,00,000. How should these be presented?

Show the solution

Same counterparty: yes.
Legal right to set off: yes, enforceable.
Intention to settle net: yes.
Both Ind AS 32 tests are met, so the two are effectively one financial asset.
Net = ₹8,00,000 − ₹5,00,000 = ₹3,00,000.

Answer: Present a net financial asset of ₹3,00,000. Because the instruments are set off under Ind AS 32, give the Ind AS 107 offsetting disclosures: gross amounts, amounts set off and the net amount presented.

Example 2

Kaveri Ltd has a derivative asset of ₹2,00,000 and a repo payable of ₹1,50,000 with the same bank under an enforceable master netting agreement. It does not intend to settle net or simultaneously. The payable is at amortised cost and the derivative at fair value. Advise on presentation and disclosure.

Show the solution

Legal right: the master netting agreement is enforceable, so this test is met.
Intention to settle net or simultaneously: absent. The right alone is not enough (para 46).
Presentation: show the asset ₹2,00,000 and liability ₹1,50,000 separately.
Disclosure: the instruments are under an enforceable master netting arrangement, so the Ind AS 107 offsetting disclosures apply even though nothing is set off.
Include instruments at recognised amounts and describe the measurement difference (fair value versus amortised cost) as para B42 requires.

Answer: Present gross: asset ₹2,00,000 and liability ₹1,50,000. Still give the offsetting disclosures for master netting arrangements, including the measurement differences.

Exam tips

In case scenarios, underline words on intention and timing. They decide the answer.
MCQs often test one half of the test. Remember that right alone and intention alone both fail.
For a descriptive answer, structure it as test, application, presentation, disclosure.
Know the three risk types and the liquidity risk definition word for word in substance.
Always show the gross, set-off and net figures in numerical answers.

Practice questions from Accounting of Financial Instruments

Presentation and Disclosure (Ind AS 107) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Presentation and Disclosure (Ind AS 107): frequently asked questions

When can a financial asset and liability be offset under Ind AS 32?

When the entity has a legally enforceable right to set off and intends either to settle net or to realise the asset and settle the liability simultaneously. Both conditions are needed. Otherwise present them separately.

Does a master netting agreement allow offsetting?

Not by itself. Offsetting still needs the intention to settle net or simultaneously. However, Ind AS 107 offsetting disclosures apply to instruments under an enforceable master netting arrangement whether or not they are set off.

What counts as simultaneous settlement?

Ind AS 32 treats realisation and settlement as simultaneous only when they occur at the same moment. A clearing house in an organised market is a typical example. Even brief delays create credit or liquidity exposure.

What is liquidity risk under Ind AS 107?

It is the risk that an entity will have difficulty meeting obligations on financial liabilities settled by delivering cash or another financial asset.