4.7 Balance Sheet Presentation — Offsetting

ASC 210-20-20 defines a right of setoff as “a debtor’s legal right, by contract or otherwise, to discharge all or a portion of the debt owed to another party by applying against the debt an amount that the other party owes to the debtor.” A right of setoff exists when all of the criteria in ASC 210-20-45-1 are met.

An entity that purchases insurance from a third-party insurer generally remains primarily obligated for insured liabilities; however, the entity should carefully evaluate the insurance contract and applicable laws. Under U.S. GAAP, it is only appropriate to offset assets and liabilities when the four above conditions in ASC 210-20-45-1 for the existence of a right of setoff are met.

It is not appropriate to offset a receivable for a probable insurance recovery against a contingent liability unless the requirements of ASC 210-20 are met. In such circumstances, the conditions for offsetting would typically not be met because an insurance receivable and claim liability generally would be with different counterparties. For example, insurance proceeds received by the reporting entity are usually from a third-party insurer, whereas the contingent liability related to claim liabilities would be to a party other than the third-party insurer.