Is it appropriate to offset notes payable against accounts receivable?

No.

In general, offsetting assets and liabilities is not allowed because it can be used to disguise the true picture of what is going on - creative accounting, in other words.

In this instance, if you offset a note payable against accounts receivable, then on the statement of financial position, the receivables will be reduced by the amount of the payable, and the payable won't show at all because it's been absorbed by the receivables. This in turn, understates receivables because the payable has been offset against them. The effect of doing that would mean that the SOFP/Balance sheet would not show a true and fair state of affairs of the company.

Offsetting is allowed in some cases where the overall effect is in the same category. So fluctuations in exchange rates resulting in gains/losses for example, can be offset so long as they relate to the same asset/liablity because the result is going to be the same anyway and they can therefore be presented net.

You are the owner of an accounting firm. Your client is Abbott Construction Company. The Controller for your client believes that it is appropriate to offset a note payable to Oregon Bank against an account receivable from Oregon Bank related to remodeling services provided to the bank. Abbott Construction Company is requesting guidance concerning the criteria to be met to allow such offsetting. - That's the problem question.

This Subtopic provides criteria for offsetting amounts related to certain contracts and provides guidance on presentation. It is a general principle of accounting that the offsetting of assets and liabilities in the balance sheet is improper except if a right of setoff exists. - and that's how the codification explains it.

So am I understanding this correctly? Like you said it's improper, unless... the right of setoff.
No.

In general, offsetting assets and liabilities is not allowed because it can be used to disguise the true picture of what is going on - creative accounting, in other words.

In this instance, if you offset a note payable against accounts receivable, then on the statement of financial position, the receivables will be reduced by the amount of the payable, and the payable won't show at all because it's been absorbed by the receivables. This in turn, understates receivables because the payable has been offset against them. The effect of doing that would mean that the SOFP/Balance sheet would not show a true and fair state of affairs of the company.

Offsetting is allowed in some cases where the overall effect is in the same category. So fluctuations in exchange rates resulting in gains/losses for example, can be offset so long as they relate to the same asset/liablity because the end result is going to be the same anyway and they can therefore be presented net.

Yes, that's exactly it.

And on top of the right of offset, under IFRS anyway (IAS 32), the offset also needs to happen at the same time i.e. the payment made/payment received must happen at the same time, meaning that a payment received on 5 Jan cannot be offset against a liability for a payment due to be paid out on 8 Feb.

But if both were to happen on 5 Jan then, assuming the right of offset, it would be fine to offset. This because offsetting creates a single transaction, so it has to happen at the same time.