compensating balances

This Subtopic governs how depository and lending institutions offset and combine amounts on the balance sheet. Its core rules: unearned premiums and unpaid claims on credit life and credit accident and health insurance issued to finance customers are deducted from finance receivables in consolidation (or the net amount presented with adequate note disclosure), while unpaid claims on property and level term life insurance—and credit coverage on receivables owned by unrelated entities—must be presented as liabilities. Reciprocal balances with another financial institution are offset only if they will be offset in the process of collection or payment, and restrictions on cash balances must be disclosed.

This subtopic governs how a real estate investment trust (REIT) accounts for "operating support" received from its external adviser — arrangements designed to guarantee the REIT a certain return, such as buying loans or property above fair value, debt forgiveness, advisory fee reductions, compensating balances, or cash payments. The REIT must adjust any transferred assets or liabilities to fair value at the transaction date and recognize the support effectively obtained as income or as a reduction of advisory fees. The effect of these transactions must be reported separately in the income statement and fully disclosed as a related party relationship.