The intention to settle net

Learning objectives

• Analyse past practices and documented risk management to assess the intention to settle on a net basis.L3
• Justify the conclusion on the intention to settle a portfolio of instruments on a net basis.L3

Normative references

• IAS 32 §AG38EThe criterion in para. 42(b) requires the intention to settle on a net basis or to realise the asset and settle the liability simultaneously; having a right to settle net does not establish that intention, since the entity may still realise the asset and settle the liability separately.
• IAS 32 §AG38FGross settlement meets the net settlement criterion when its outcome is, in effect, equivalent to net settlement, which is the case only if the mechanism eliminates or results in insignificant credit and liquidity risk and processes receivables and payables in a single settlement process or cycle; the paragraph describes the features of a gross settlement system that meets the criterion (simultaneous submission, commitment of the parties, cash flows that cannot be changed after submission, linked failure of securities-backed transactions and resubmission, same settlement institution, intraday credit facility that is virtually certain to be honoured).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

1 question

• Hydre SA has, towards Kappa SA, a receivable and a payable with a legally enforceable right of set-off, and the contract allows net settlement. For three years, however, Hydre has settled its receivables and payables with Kappa separately, on different dates, and its documented liquidity risk management policy provides for gross settlement (case facts). What does Hydre conclude on the criterion of intention to settle net?L3