Both the legal right and the settlement intention must be established
An Ind AS reporter offsets a recognised financial asset and financial liability only when it currently has a legally enforceable right to set off the recognised amounts and intends either net settlement or simultaneous realisation and settlement. The same counterparty, a collateral link, management’s preferred net exposure or a default-only netting clause does not by itself establish both conditions. When both conditions are met, paragraph 42 requires net presentation; it is not a free accounting-policy choice.
The applicable presentation framework
For FY 2025–26 reporting, this guide addresses Ind AS 32 paragraphs 42–50 and AG38A–AG38F in the ICAI 2025–26 official compendium. It is for entities applying Ind AS, not a generic netting instruction for every Indian entity. Ind AS 1 paragraphs 32–33 provides the general prohibition on offsetting unless an Ind AS requires or permits it, while distinguishing valuation allowances from offsetting. Recognition, measurement and derecognition require their own applicable-standard analysis.
A legal opinion must cover the actual arrangement
Under AG38B–AG38D the right cannot depend on a future event and must be enforceable in the normal course, on default, and on insolvency or bankruptcy of the entity and all counterparties. Identify the contracts, parties, recognised amounts and relevant jurisdictions. An opinion saying only that a close-out clause works on default leaves the normal-course question unanswered. Ask for a conclusion on the particular right being relied upon, not merely whether a master agreement exists.
Set-off should be mapped to specified recognised balances. Do not spread an agreement covering one transaction class over unrelated balances or different legal counterparties. Where only some balances are covered, retain a bridge showing covered amounts, the offset actually presented and the remaining gross balances. The ledger should preserve the underlying transaction history even where the financial statements show a permitted net amount.
Prove how cash will actually settle
Treasury should document settlement instructions and operational capability as at the reporting date. Separate payments on the same day can still create an intervening credit or liquidity exposure. AG38F recognises a gross settlement mechanism equivalent to net settlement only under its demanding risk-elimination and single-process/cycle conditions. Do not infer equivalence from a common payment date or common bank name. A settlement-system assessment should cover commitment, failure handling, transfer linkage, settlement institution and dependable intraday funding where relevant.
Legal enforceability and settlement intention need separate sign-offs. A right that management will not exercise cannot support offsetting merely because net settlement would simplify reporting. Conversely, a plan to pay only the net balance cannot cure the absence of an enforceable right. Compare the resulting presentation with what the counterparty confirms and with the actual settlement evidence; investigate differences rather than deleting the gross audit trail.
Keep presentation, impairment and disclosures separate
A receivable presented after its loss allowance is a measurement presentation, not the offset of that receivable against a payable. A pledged deposit also remains an asset unless the applicable recognition and offsetting tests support a different result. Likewise, a netting agreement may be relevant to credit-risk disclosures without permitting balance-sheet offsetting. Ind AS 107 paragraphs 13A–13E addresses disclosures for the specified offsetting/netting arrangements, including gross amounts, recognised offsets and other covered amounts. Assess that disclosure scope even when the balance sheet remains gross.
The examples below assume the stated carrying amounts have already been correctly measured. They calculate presentation, not ECL, fair value, GST, income tax or exchange differences. Legal enforceability is an expressly given premise in the qualifying cases; the arithmetic is not a substitute for establishing that premise in practice.
Worked illustrations
These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.
Illustrative example 1: A genuine current right and net settlement
An Ind AS company has a recognised ₹125 lakh receivable and ₹80 lakh payable with the same counterparty. Assume the right covering both amounts is enforceable in every required circumstance and the company intends net settlement. Offset ₹80 lakh from both sides and present a ₹45 lakh financial asset: ₹125 lakh − ₹80 lakh. The offset itself produces no gain or loss.
Illustrative example 2: An unused right
Recognised amounts are a ₹95 lakh asset and ₹70 lakh liability. A qualifying current set-off right exists, but the company intends separate non-simultaneous collection and payment. Present ₹95 lakh and ₹70 lakh separately. The arithmetic difference of ₹25 lakh is not the balance-sheet presentation because the intention condition fails.
Illustrative example 3: Default-only master netting
Derivatives with one bank show ₹30 lakh of recognised assets and ₹22 lakh of liabilities. Assume the master agreement permits close-out netting only on default and does not create the required current normal-course right. The balance sheet remains ₹30 lakh assets and ₹22 lakh liabilities. A calculated difference of ₹8 lakh may help describe the assumed arrangement, but it is not a substitute for the required disclosures or permission to present an ₹8 lakh asset.
Illustrative example 4: Different counterparties in the same group
The company has a ₹60 lakh receivable from X Ltd and a ₹45 lakh payable to Y Ltd. X and Y have a common parent, but assume there is no enforceable three-party set-off arrangement. Present ₹60 lakh and ₹45 lakh separately; the ₹15 lakh group-wide difference does not establish a right between the reporting company and those legal counterparties.
Illustrative example 5: A deposit pledged against borrowing
A ₹200 lakh deposit is pledged to support a ₹150 lakh borrowing. Assume the documents provide security only, with no qualifying current set-off right and settlement intention. Present the deposit and borrowing separately at ₹200 lakh and ₹150 lakh. The apparent net ₹50 lakh exposure does not authorise reducing both asset and liability by ₹150 lakh.
Illustrative example 6: A qualifying equivalent gross-settlement mechanism
A ₹90 lakh asset and ₹110 lakh liability are covered by a qualifying current legal right. Assume a documented system assessment establishes all relevant AG38F conditions, the outcome is equivalent to net settlement, and the company intends that process. Net presentation gives a ₹20 lakh liability: ₹110 lakh − ₹90 lakh. A mere same-day instruction without those conditions would not support this conclusion.
Illustrative example 7: Loss allowance does not permit payable netting
A receivable’s gross carrying amount is ₹110 lakh and its correctly determined loss allowance is ₹10 lakh. Present the receivable at ₹100 lakh after that valuation adjustment. A separate ₹60 lakh payable lacks the required set-off right. Present ₹100 lakh as asset and ₹60 lakh as liability; neither ₹40 lakh net assets nor a ₹50 lakh balance obtained by subtracting the payable from the gross receivable is the proper presentation here.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Confirm the reporting framework | Ind AS applicability and instrument classification |
| 2 | Reconcile recognised carrying amounts | Ledger, measurement and counterparty confirmations |
| 3 | Identify the precise legal parties | Contracts and entity identifiers |
| 4 | Map the balances covered by the right | Agreement-to-balance schedule |
| 5 | Verify current legal enforceability | Normal-course, default and insolvency analysis |
| 6 | Confirm settlement intention | Approved treasury instructions and practice |
| 7 | Test any simultaneous/equivalent mechanism | AG38F assessment and operational evidence |
| 8 | Keep allowances and security separate | Impairment and collateral working papers |
| 9 | Reconcile gross, offset and net presentation | Balance-sheet bridge without unexplained differences |
| 10 | Complete the relevant disclosures | Ind AS 107 scope assessment and note reconciliation |
Sixteen practitioner FAQs
1. Is offsetting optional once both paragraph 42 conditions are met?
The paragraph requires net presentation in that situation. Record why the conditions are met rather than describing netting as an elective policy.
2. Does having one counterparty establish the legal right?
No. Obtain the contractual and jurisdictional analysis for the identified balances.
3. Can management intention alone support net presentation?
No. Keep intention evidence separate from evidence of the current enforceable right.
4. Is a right that works only on default enough?
It leaves the required normal-course right unestablished. Review disclosure consequences without assuming a balance-sheet offset.
5. What should a legal opinion identify?
The parties, agreements, covered amounts, jurisdictions and enforceability in the relevant circumstances, together with material assumptions and limits.
6. Are two payments on the same day simultaneous?
A shared date is insufficient. Examine timing and credit/liquidity exposure, or establish the equivalent-mechanism conditions.
7. Does a common settlement bank guarantee equivalence?
No. It is only one possible system feature; assess the full process and relevant AG38F conditions.
8. Can a receivable from a group company offset a payable to another group company?
Common ownership does not supply the missing legal arrangement. Establish the actual right and settlement facts.
9. Is collateral the same as settlement?
No. Identify what the security document actually permits and keep the secured asset and borrowing analysis separate.
10. Should an offset create income?
Offsetting recognised balances is a presentation exercise. Any separate gain, loss, settlement or derecognition needs its own accounting basis.
11. Is a loss allowance a prohibited offset?
Ind AS 1 distinguishes valuation allowances. Do not confuse measuring a receivable with setting it off against another obligation.
12. Can a master netting agreement matter without balance-sheet netting?
Yes. Assess the applicable Ind AS 107 disclosure scope and risk information even when the two balances remain gross.
13. Can a net treasury exposure report be copied into the balance sheet?
Only after reconciling its scope and measurement to the recognised balances and applying the presentation tests.
14. What if an agreement covers only part of the portfolio?
Build a covered-balance schedule and preserve the remaining gross amounts. Do not extend the agreement beyond its actual terms.
15. Should gross ledger records be erased after net presentation?
No. Retain the transaction records and an auditable presentation bridge supporting confirmations, measurement and disclosures.
16. When should an existing conclusion be revisited?
Reassess when contracts, jurisdictions, counterparties, legal advice or settlement intentions and mechanisms change, and at the relevant reporting date.
Conclusion
Close the file with separate legal-right and settlement conclusions, a gross-to-net reconciliation and the disclosure assessment. Economic net exposure alone cannot replace that evidence.