Question 1

AASB 132 allows for all types of assets and liabilities to be offset as long as the entity intends to settle on a net basis:

Accepted Answer

AASB 132 only allows financial assets and financial liabilities to be offset if there is a legally enforceable right to set off and the entity intends to settle on a net basis.

Question 2

What is the AASB 132 requirement in relation to debt set-off?
A) That assets and liabilities may only be set-off against each other for balance sheet purposes if the asset and liability are classified as current and there is agreement with the other party to the liability, either legal or constructive, that the asset and liability are to be set-off.
B) That assets and liabilities be set-off against each other for balance sheet purposes when a legally recognised right of set-off for these items exists and the reporting entity intends to settle on that basis, or to realise the asset and settle the liability simultaneously.
C) That assets and liabilities be set-off against each other for balance sheet purposes when the reporting entity intends to realise an asset and settle a related liability simultaneously.
D) That assets and liabilities may only be set-off against each other for balance sheet purposes when there is a legal arrangement to set-off a financial asset and a financial liability and the other party to the liability agrees to the right to set-off.
E) None of the given answers.

Accepted Answer

AASB 132 requires that assets and liabilities be set-off against each other for balance sheet purposes when a legally recognised right of set-off for these items exists and the reporting entity intends to settle on that basis or to realise the asset and settle the liability simultaneously. This means that there must be a legal right of set-off, and the reporting entity must have the intention to settle the obligation and asset using set-off.

Question 3

Debt extinguishment occurs when a liability can no longer be considered a primary obligation for an entity:

Accepted Answer

Debt extinguishment generally occurs when a liability is settled or paid off, and no longer remains a primary obligation for the entity. This can happen through various means such as prepayment, refinancing, or restructuring. Once the liability is fully extinguished, it is removed from the entity's balance sheet and no longer impacts its financial statements.

Question 4

Under the old AASB 1014 the debt-holder(s)may not be aware that a debt defeasance scheme is in place:

Accepted Answer

Under the old AASB 1014, the debt holder(s) may not be aware that a debt defeasance scheme is in place.

Question 5

The term defeasance means the setting off of one thing against another:

Accepted Answer

Defeasance refers to the nullification or voiding of a contract or obligation, not the setting off of one thing against another.

Question 6

The existence of a right to set off:
A) Is sufficient to allow set off of a financial asset and financial liability.
B) Does not have to be enforceable at law to allow set off of a financial asset and financial liability.
C) Is not sufficient to allow set off of a financial asset and financial liability, without the intention to set off and legal enforceability of the right to set off.
D) Is not discussed in AASB 132.
E) None of the given answers.

Accepted Answer

The existence of a right to set off is not sufficient to allow set off of a financial asset and financial liability. It also depends on the intention to set off and legal enforceability of the right to set off. This is stated in paragraph 42 of AASB 132.

Question 7

AASB 132 only allows assets and liabilities to be offset against one another if a legally recognised right to set-off exists for these items:

Accepted Answer

AASB 132 requires a legally recognised right of set-off for assets and liabilities to be offset against each other. Otherwise, they cannot be netted off in the financial statements.

Question 8

AASB 132 "Financial Instruments: Presentation" supports a substance over from approach in the accounting treatment for Insubstance Debt Defeasance (ISDD).

Accepted Answer

AASB 132 does not specifically address Insubstance Debt Defeasance (ISDD) or support a substance over form approach for it.

Question 9

The changes under AASB 132 have removed the need for creditors to be involved in the defeasance process:

Accepted Answer

AASB 132 deals with the presentation of financial instruments and does not specifically address the involvement of creditors in the defeasance process.

Question 10

A futures contract is an example of a financial instrument where the net amount of a financial asset and a financial liability may be presented in the statement of financial position.

Accepted Answer

A futures contract is a financial instrument where both parties agree to buy or sell an underlying asset at a predetermined price and date in the future. As a result, it represents both a financial asset and a financial liability for the parties involved, which can be presented as such in the statement of financial position.

Question 11

Legal defeasance is not addressed in AASB 132 and will no longer be used in Australia.

Accepted Answer

The answer of Legal defeasance is not addressed in AASB...

Question 12

A right of set-off is a debtor's legal right,by contract or otherwise,to settle or otherwise eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor.

Accepted Answer

A right of set-off allows a debtor to offset an amount owed to a creditor by applying against that amount an amount owed to the debtor by the same creditor. This can be a contractual or legal right.

Question 13

A right of set-off may still be applied in the case of Insubstance Debt Defeasance (ISDD)if the entity intends to settle on a net basis,or to realise the asset and settle the liability simultaneously.

Accepted Answer

The answer of A right of set-off may still be...

Question 14

In a set-off,the gearing ratio of the entity is usually increased.

Accepted Answer

A set-off typically involves offsetting liabilities against assets, which does not inherently increase the gearing ratio, as it affects both sides of the balance sheet.

Question 15

One of the requirements for setting off in AASB 132 is the intention to offset.Which of the following statements about the "intention to set off" is correct?
A) The intention to offset is only required where the legal right to set-off is disputed.
B) Without the intention to offset the past cash flows of the entity will not be affected.
C) The intention of both parties to settle is insufficient unless a legal right exists.
D) Must be stipulated in writing for it to apply under ASB 132.
E) None of the given answers.

Accepted Answer

According to AASB 132, the intention of both parties to settle is insufficient unless a legal right exists, which means there must be both an intention and a legal right to set off. Option A is incorrect because the intention to offset is always required, regardless of whether the legal right is disputed or not. Option B is incorrect because the past cash flows of the entity will be affected whether or not there is an intention to offset. Option D is incorrect because stipulating in writing is not a requirement under AASB 132.

Question 16

Reasons provided in AASB 132 for the required treatment of the set-off of assets and liabilities include:
A) The gross basis is generally preferred, except in the situation outlined because the parties to the arrangement have a legal obligation that takes precedence over reporting form.
B) Setting off an obligation against an asset in the circumstances described allows the entity to manage its risk exposure and should be encouraged by reporting requirements.
C) While the gross basis shows more accurately the detailed transaction, the effect on ratios that may be used to analyse the financial statements of the reporting entity means that they will no longer reflect the economic substance of the arrangement.
D) The presentation of the asset and the liability on a net basis reflects more appropriately the amounts and timing of future cash flows.
E) None of the given answers.

Accepted Answer

The net basis presentation reflects the economic reality of the arrangement by showing the actual amounts and timing of future cash flows, which is a key reason for allowing set-off under AASB 132.

Question 17

Insubstance debt defeasance refers to an arrangement where assets are placed in trust,meaning that the creditor has now been paid in full:

Accepted Answer

Insubstance debt defeasance involves placing assets in a trust to cover future debt payments, but it does not mean the creditor has been paid in full immediately.

Question 18

The definition of a set-off is that an asset is reduced by the amount of a liability and a net liability remains:

Accepted Answer

A set-off involves offsetting a liability against an asset, resulting in a net asset or zero balance, not a net liability.

Question 19

Release from the primary obligation for a debt may be achieved by replacement by another debt:

Accepted Answer

This is true. When a debt is replaced by another debt, the original debtor is released from their primary obligation to pay the original debt. However, this new debt must also meet the same legal requirements and terms as the original debt to fully release the debtor from their obligation.

Question 20

The "Offsetting" in AASB 132 "Financial Instruments: Presentation" is similar to "derecognition" in AASB 139.

Accepted Answer

Offsetting refers to presenting financial assets and liabilities on a net basis, while derecognition involves removing a financial asset or liability from the balance sheet entirely.

Quiz 12: Set-Off and Extinguishment of Debt