7.

Financial instruments (IFRS compared to US GAAP)

7 Financial instruments

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 7. Financial instruments (IFRS compared to US GAAP)

7.1 Scope and definitions

IFRS US

(IAS 39) (ASC Subtopic 310-10 and 20; ASC Subtopic 320-
10; ASC Subtopic 325-20; ASC Subtopic 405-20;
ASC Topic 450; ASC Subtopic 460-10; ASC Subtopic
470-20, 50, and 60; ASC Subtopic 480-10; ASC
Subtopic 505-10, ASC Subtopic 810-10; ASC
Subtopic 815-10, 15, and 25; ASC Subtopic 820-10;
ASC Subtopic 825-10; ASC Subtopic 830-20; ASC
Topic 840; ASC Topic 860; ASC Subtopic 940-320;
ASC Subtopic 946-320 and 830; ASC Subtopic 948-
10; SAB Topic 5-M; SAB Topic 6-L)

Overview

IFRS US

• A 'financial instrument' is any • Like IFRS, a 'financial instrument' is

contract that gives rise to both a any contract that gives rise to both a
financial asset of one entity and a financial asset of one entity and a
financial liability or equity instrument financial liability or equity instrument
of another entity. of another entity.

• Financial instruments include a • Like IFRS, financial instruments

broad range of financial assets and include a broad range of financial
financial liabilities. They include both assets and financial liabilities. They
primary financial instruments (e.g. include both primary financial
cash, receivables, debt and shares instruments (e.g. cash, receivables,
in another entity) and derivative debt and shares in another entity)
financial instruments (e.g. options, and certain derivative financial
forwards, futures, interest rate instruments (e.g. options, forwards,
swaps and currency swaps). futures, interest rate swaps and
currency swaps).

• The standards on financial • Like IFRS, the codification topics on

instruments apply to all financial financial instruments apply to all
instruments, except for those financial instruments, except for
specifically excluded from their those specifically excluded from their
scope. scope.

• The first chapters of IFRS 9 • The FASB is also in the process of

Financial Instruments, which deal revising its financial instruments
with the classification and accounting. However, no revised

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 7. Financial instruments (IFRS compared to US GAAP)

measurement of financial assets and standard has yet been issued.

liabilities, derecognition and fair
value, are effective for annual
periods beginning on or after 1
January 2015. However, the IASB
has tentatively decided to postpone
the effective date at the date of this
publication being issued. See
chapter 7A for a discussion of the
forthcoming requirements.

Scope

IFRS US

The exemptions from the standard dealing with the The exemptions from the recognition and
recognition and measurement requirements for measurement requirements for financial
financial instruments, which are the subject of this instruments, which are the subject of this chapter,
chapter, are outlined below. [IAS 39.2-7] are outlined below and differ in certain respects
from IFRS. [815-10-15]

Investments in subsidiaries, associates and joint Like IFRS, investments in subsidiaries and equity-
ventures except for: method investees are excluded from the accounting
described below. However, unlike IFRS, certain
• investments in associates and joint investments that would otherwise be accounted for
ventures held by venture capital and under the equity method are eligible for the fair
similar organisations that have value option regardless of whether the investor is a
elected to account for such venture capital or similar organisation (see chapter
investments at fair value through 3.5). Certain investments in joint ventures are
profit or loss. However, there is no accounted for by proportionate consolidation.
exemption for these entities from However, unlike IFRS, entities meeting the definition
the requirement to consolidate all of investment companies follow specialised industry
entities that they control. [IAS 28.1, guidance and account for their investments at fair
18-19, 39.2(a), 39.AG3] value through profit or loss rather than applying the
• Derivatives on such interests unless equity method or consolidation accounting; and
they meet definition of equity. unlike IFRS, this accounting is not optional. [810-10-
45-14, 825-10-15-4, 946-320-35-1]

Rights and obligations under leases, which are Like IFRS, rights and obligations under leases are
accounted for under the leasing standard (see accounted for under the leasing codification topic
chapter 5.1) are excluded from the scope of the (see chapter 5.1). Like IFRS, derivatives embedded
financial instruments standard, except for the in leases are accounted for separately if they are not
following: clearly and closely related to the lease agreement
(host); however, because the bifurcation guidance
• derecognition of lease receivables differs from IFRS, differences may arise in practice.
and payables; Unlike IFRS, guidance on the derecognition of lease
• impairment of lease receivables; receivables (except for sales-type and direct finance
and lease receivables) and payables, and the impairment
of lease receivables, is provided in the leasing topic.
• derivatives embedded in leases. [815-10-15-79 - 15-81, 840]
[IAS 39.2(b)]

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 7. Financial instruments (IFRS compared to US GAAP)

Employers' rights and obligations under employee Like IFRS, employers' rights and obligations under
benefit plans are accounted for under the employee employee benefit plans are accounted for under the
benefits standard (see chapter 4.4). [IAS 39.2(c)] employee benefits codification topics (see chapter
4.4), although these topics differ in certain respects
from IFRS. [825-10-15-5c]

Issued financial instruments classified as equity (see Like IFRS, issued financial instruments classified as
chapter 7.3). [IAS 39.2(d)] equity are excluded from the accounting described
below (see chapter 7.3). However, the
determination of which instruments are considered
own equity differs in certain respects from IFRS.
[815-10-15-74 - 15-78]

The following rights and obligations are excluded Unlike IFRS, US GAAP excludes insurance contracts
from the scope of the financial instruments issued by an insurance company from the scope of
standards: the financial instruments codification topics if they
are subject to the specialised insurance accounting
• Those arising under an insurance topic (see chapter 8.1). Unlike IFRS, under US GAAP
contract as defined in the insurance an insurance company may make an irrevocable
standard (see chapter 8.1), other election on a contract-by-contract basis to account
than: for insurance contracts issued by an insurance
- an issuer's rights and obligations company at fair value through profit or loss if the
arising under an insurance contract is a financial instrument or it permits the
contract that meets the definition insurer to settle by paying a third party to provide
of a financial guarantee contract goods or services. Unlike IFRS, US GAAP excludes
if certain conditions are met. If financial guarantee contracts from the scope of the
an issuer of financial guarantee financial instruments codification topics. Also, there
contracts has previously are differences between the IFRS and US GAAP
asserted explicitly that it regards definitions of a financial guarantee. Like IFRS, the
such contracts as insurance requirements described below apply to a derivative
contracts and has used that is embedded in an insurance contract issued by
accounting applicable to an insurance company. [815-10-15-52 - 15-57, 825-
insurance contracts, then the 10-15-4, 15-58]
issuer may elect to apply either
the financial instruments
standard or the insurance
standard to such contracts; and
- a derivative that is embedded in
a contract in the scope of the
insurance standard if the
derivative is not itself a contract
in the scope of the insurance
standard.
• Those arising under a contract that
is in the scope of the insurance
standard because it contains a
discretionary participation feature.
[IAS 39.2(e)]

A forward contract between an acquirer and a Like IFRS, there is an exclusion from the financial
selling shareholder to buy or sell an acquiree that instruments codification topics for contracts between
will result in a in a business combination at a future an acquirer and a seller to enter into a business

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 7. Financial instruments (IFRS compared to US GAAP)

date is excluded from the scope of the financial combination at a future date. However, US GAAP
instruments standard if certain conditions are met. does not contain the same limitations on this
The scope exclusion does not apply to option exemption and differences from IFRS may arise in
contracts, whether or not they are currently practice. [815-10-15-74(c)]
exercisable, that on exercise will result in obtaining
control of an entity. The scope exemption also does
not apply by analogy to contracts to acquire
investments in associates and similar transactions
such as investments in joint ventures. [IAS 39.2(g),
BC24B-BC24D]

The following loan commitments are in the scope of Unlike IFRS, only the loan commitments of issuers of
the financial instruments standard: mortgage loans to be held for sale are accounted for
as derivatives. All other loan commitments are
• loan commitments designated at fair accounted for as contingent liabilities (see chapter
value through profit or loss; 3.12), unless they are designated as at fair value
• loan commitments that can be through profit or loss. [815-10-15-69 - 15-71, 825-
settled net in cash or by delivering 10-15-4]
or issuing another financial
instrument;
• all loan commitments in a particular
class if an entity has a past practice
of selling the assets resulting from
such loan commitments shortly after
origination; and
• commitments to provide a loan at a
below-market interest rate. [IAS
39.2(h), 4]

Other loan commitments are outside of the scope of

the financial instruments standard and are
accounted for under the standard on provisions (see
chapter 3.12). The derecognition of all loan
commitments is in the scope of the financial
instruments standard.

Contracts and obligations under share-based Like IFRS, contracts and obligations under share-
payment transactions are generally accounted for based payment transactions are generally accounted
under the share-based payment standard (see for under the share-based payment codification topic
chapter 4.5). [IAS 39.2(i)] (see chapter 4.5). However, the scope of the share-
based payments codification topic differs in certain
respects from IFRS. [815-10-15-74]

Reimbursement rights in respect of recognised Reimbursement rights in respect of certain

provisions are accounted for under the provisions recognised contingencies (provisions) are accounted
standard (see chapter 3.12). [IAS 39.2(j)] for under specific codification subtopics (e.g.
environmental contingencies - see chapter 3.12),
which can give rise to differences from IFRS in
practice. [410-30-35-7 - 35-12]

Purchases and sales of non-financial items

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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

A contract to buy or sell a non-financial item Like IFRS, a contract to buy or sell a non-financial
generally meets the definition of a derivative if it can item generally meets the definition of a derivative if
be settled net in cash or another financial instrument the terms of the contract permit or require either
(see below). Contracts that are entered into and party to settle it net in cash or another financial
continue to be held for the receipt or delivery of a instrument, or the non-financial item that is the
non-financial item in accordance with the entity's subject of the contract is readily convertible into
expected purchase, sale or usage requirements are cash. Like IFRS, contracts for the delivery of a non-
exempt from being accounted for as derivatives (the financial item for use or sale in the normal course of
'normal sales and purchases' or 'own use' business are generally exempt from being accounted
exemption). [IAS 39.5-6] for as derivatives, but unlike IFRS certain additional
conditions have to be met:
• it is at normal terms for normal
quantities;
• the contract has a price based on an
underlying that is clearly and closely
related;
• it is probable at inception and
throughout the contract that the
contract will not settle net and will
result in physical delivery; and
• there is contemporaneous
documentation. [815-10-15-22 - 15-
39, 15-83 - 15-101]

Unlike IFRS, the normal purchase/normal sale

exemption is elective under US GAAP. [815-10-15-37
- 15-39]

In respect of the 'own use exemption', the entity Like IFRS, a past practice of settling similar contracts
should have no past practice of: net in cash (or other financial instruments), or taking
delivery of the underlying and selling it within a short
• settling similar contracts net in cash period after delivery for trading purposes, may make
or other financial instruments; or the contract ineligible for the normal
• taking delivery of the underlying and purchase/normal sale exemption and therefore the
selling it within a short period after contract would be accounted for as a derivative.
delivery for trading purposes. [IAS [815-10-15-29]
39.6]
Also, contracts that permit either party to settle net
in cash or contracts in respect of items that are
readily convertible to cash have to be evaluated to
determine if they are in the scope of the financial
instruments standard.

In our view, 'past practice' should be interpreted Like IFRS, 'past practice' is interpreted narrowly,
narrowly. Infrequent historical incidences of net such that infrequent historical incidences of net
settlement in response to events that could not have settlement in response to events that could not have

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 7. Financial instruments (IFRS compared to US GAAP)

been foreseen at inception of a contract would not been foreseen at inception of a contract would not
taint an entity's ability to apply the own use taint an entity's ability to apply the normal
exemption to other contracts. purchase/normal sale exemption to other contracts.
However, because US GAAP has more extensive
guidance on past practice, differences from IFRS
may arise in practice.

A written option, under which an entity might be Unlike IFRS, the exemption cannot generally be
required to purchase or sell a commodity or other applied to contracts with optionality features over
non-financial asset that can be settled net in cash or quantity (which includes both purchased and written
another financial instrument, can never qualify for options). However, despite the above prohibitions,
the own use exemption. Sometimes forward certain power purchase and sales agreements may
contracts, which may qualify for the own use still qualify for the exemption even if they are written
exemption, are combined with written options in one options and/or even if the entity has a past practice
contract. In our view, in such cases the contract may of net settling such contracts, unlike IFRS. [815-10-
be split so that the forward element may qualify as 15-42 - 15-44]
own use even though the written option component
will not. [IAS 39.7]

If a contract to buy or sell a non-financial item Unlike IFRS, a contract to buy or sell a non-financial
contains an embedded derivative, then an entity first item cannot be separated into one or more
determines whether the embedded derivative should components, such that one component qualifies for
be separated from the host contract and accounted the normal purchase/normal sale scope exemption
for separately. If the embedded derivative is under the derivatives codification topic while one or
accounted for separately, then in our view the host more other components do not qualify for the scope
contract might still qualify for the own use exemption. [815-10-15-52 - 15-57]
exemption. [IAS 39.11]

Definition

IFRS US

A 'financial asset' is any asset that is: Like IFRS, a 'financial asset' is any asset that is:
• cash; • cash;
• a contractual right: • a contractual right:
- to receive cash or another - to receive cash or another
financial asset; or financial asset; or
- to exchange financial assets or - to exchange financial assets or
financial liabilities under financial liabilities under
potentially favourable conditions; potentially favourable conditions;
or
• an equity instrument of another
entity; or • an equity instrument of another
entity. [860-10-20]
• a contract that will or may be settled
in the entity's own equity Unlike IFRS, the definition of a financial asset does
instruments and is: not address contracts that will or may be settled in
the entity's own equity instruments.
- a non-derivative for which the
entity is or may be obliged to

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 7. Financial instruments (IFRS compared to US GAAP)

receive a variable number of the

entity's own equity instruments;
or
- a derivative that will or may be
settled other than by the
exchange of a fixed amount of
cash or another financial asset
for a fixed number of the entity's
own equity instruments. [IAS
32.11]

A 'financial liability' is: Like IFRS, a 'financial liability' is a contractual

obligation:
• a contractual obligation:
• to deliver cash or another financial
- to deliver cash or another asset to another entity; or
financial asset to another entity;
or • to exchange financial instruments
under potentially unfavourable
- to exchange financial conditions. [820-10-20]
instruments under potentially
unfavourable conditions; or Unlike IFRS, the definition of a financial liability does
not address contracts that will or may be settled in
• a contract that will or may be settled the entity's own equity instruments. The guidance on
in the entity's own equity such contracts is described in chapter 7.3.
instruments and is:
- a non-derivative for which the
entity is or may be obliged to
deliver a variable number of the
entity's own equity instruments;
or
- a derivative that will or may be
settled other than by the
exchange of a fixed amount of
cash or another financial asset
for a fixed number of the entity's
own equity instruments. [IAS
32.11]

An 'equity instrument' is any contract that evidences Like IFRS, an 'equity instrument' is any contract that
a residual interest in the assets of an entity after evidences a residual interest in the assets of an
deducting all of its liabilities. [IAS 32.11] entity after deducting all of its liabilities. However,
US GAAP differs from IFRS in some respects as to
what is considered a residual interest (see chapter
7.3). [505-10-05-3]

There is no definition of a 'security' under IFRS Unlike IFRS, US GAAP defines a 'security' because
because the financial instruments standards apply to certain accounting requirements apply only to
all financial instruments in their scope, irrespective instruments that meet the definition of a security. A
of whether the financial instrument is a security. 'security' is defined as a share, participation or other
interest in property or in an entity of the issuer or an
obligation of the issuer that:
• either is represented by an

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 7. Financial instruments (IFRS compared to US GAAP)

instrument issued in bearer or

registered form or, if it is not
represented by an instrument, is
registered in books maintained to
record transfers by or on behalf of
the issuer;
• is of a type commonly dealt in on
securities exchanges or markets or,
if it is represented by an instrument,
is commonly recognised in any area
in which it is issued or dealt in as a
medium for investment; and
• either is one of a class or series or
by its terms is divisible into a class
or series of shares, participations,
interests or obligations. [320-10-20]

Forthcoming requirements

IFRS US

Amendments to the consolidation standard introduce Existing US GAAP includes a consolidation exception
a consolidation exception for investment entities (as for investment companies, although a forthcoming
defined). Under the amendments, an investment change clarifies the scope of an investment
entity generally accounts for its subsidiaries under company.
the financial instruments standards at fair value
through profit or loss. The amendments are effective
for annual periods beginning on or after 1 January
2014; early application is permitted.

The amendments are discussed in chapter 5.6A. The relevant requirements of US GAAP are
discussed in chapter 5.6A

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7.2 Derivatives and embedded derivatives

IFRS US

(IAS 32, IAS 39, IFRIC 9) (ASC Subtopic 310-10 and 20; ASC Subtopic 320-
10; ASC Subtopic 325-20; ASC Subtopic 405-20;
ASC Topic 450; ASC Subtopic 460-10; ASC Subtopic
470-20, 50, and 60; ASC Subtopic 480-10; ASC
Subtopic 505-10, ASC Subtopic 810-10; ASC
Subtopic 815-10, 15, and 25; ASC Subtopic 820-10;
ASC Subtopic 825-10; ASC Subtopic 830-20; ASC
Topic 840; ASC Topic 860; ASC Subtopic 940-320;
ASC Subtopic 946-320 and 830; ASC Subtopic 948-
10; SAB Topic 5-M; SAB Topic 6-L)

Overview

IFRS US

• A 'derivative' is a financial • A 'derivative' is a financial

instrument or other contract in the instrument or other contract in the
scope of the financial instruments scope of the financial instruments
standards: codification topics:
- the value of which changes in - that has one or more
response to some underlying underlyings, and one or more
variable; notional amounts or payment
provisions or both, unlike IFRS;
- that has an initial net investment
smaller than would be required - that has an initial net investment
for other instruments that have a smaller than would be required
similar response to the variable; for other instruments that would
and be expected to have a similar
response to changes in market
- that will be settled at a future factors, like IFRS; and
date.
- that, unlike IFRS:
- requires or permits net
settlement;
- is readily settleable through a
market mechanism outside the
contract; or
- provides for delivery of an asset
that is readily convertible to
cash.

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 7. Financial instruments (IFRS compared to US GAAP)

• An 'embedded derivative' is a • Like IFRS, an 'embedded derivative'

component of a hybrid contract that is one or more implicit or explicit
affects the cash flows of the hybrid terms in a host contract that affect
contract in a manner similar to a the cash flows of the contract in a
stand-alone derivative instrument. manner similar to a stand-alone
derivative instrument.

• A 'host contract' may be a financial • Like IFRS, a 'host contract' may be a

or a non-financial contract. financial or a non-financial contract.

• An embedded derivative is not • Like IFRS, an embedded derivative is

accounted for separately from the not accounted for separately from
host contract if it is closely related to the host contract if it is clearly and
the host contract, or if the entire closely related to the host contract,
contract is measured at fair value or if the entire contract is measured
through profit or loss. In other at fair value through profit or loss.
cases, an embedded derivative is However, the US GAAP guidance on
accounted for separately as a the term 'clearly and closely related'
derivative. differs from IFRS in certain respects.
In other cases, an embedded
derivative is accounted for
separately as a derivative, like IFRS.

Derivatives

Definition

IFRS US

A 'derivative' is a financial instrument or other A 'derivative' is a financial instrument or other

contract in the scope of the financial instruments contract in the scope of the financial instruments
standards: codification topics:
• the value of which changes in • that has: (1) one or more
response to some underlying underlyings; and (2) one or more
variable - e.g. an interest rate - notional amounts or payment
provided that in the case of a non- provisions or both, unlike IFRS;
financial variable it is not specific to
the party to the contract; • that has an initial net investment
smaller than would be required for
• that has an initial net investment other instruments that would be
smaller than would be required for expected to have a similar response
other instruments that would be to the variable, like IFRS; and
expected to have a similar response
to the variable; and • that, unlike IFRS:

• that will be settled at a future date. - requires or permits net

[IAS 39.9] settlement;
- is readily settleable through a
market mechanism outside the
contract; or

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 7. Financial instruments (IFRS compared to US GAAP)

- provides for delivery of an asset

that is readily convertible to
cash. [815-10-15-83]

A derivative usually has a notional amount. However, Unlike IFRS, a contract must have a notional amount
in our view contracts without notional amounts or to meet the definition of a derivative. Like IFRS, a
with variable notional amounts also meet the contract to pay or receive a fixed amount on the
definition of a derivative. A contract to pay or receive occurrence or non-occurrence of a future event
a fixed amount on the occurrence or non-occurrence meets the definition of a derivative if the other
of a future event meets the definition of a derivative, requirements - e.g. net settlement - are met. [815-
provided that this future event depends on a 10-15-88-h]
financial variable or a non-financial variable that is
not specific to a party to the contract. [IAS 39.AG9]

Exemptions from derivative treatment

Regular-way contracts

IFRS US

'Regular-way contracts' are contracts to buy or sell Like IFRS, 'regular-way contracts' are contracts to
financial assets that will be settled within the buy or sell securities that will be settled within the
timeframe established by regulation or convention in timeframe established by regulation or convention in
the market concerned. Regular-way contracts are the market concerned. Like IFRS, US GAAP exempts
not treated as derivatives between the date from regular-way securities trades from being accounted
which the entity is committed (trade date) and the for as derivatives between trade date and settlement
date on which the instrument is actually transferred date. [815-10-15-15 - 15-21]
(settlement date). [IAS 39.9, 38, AG53-AG56]

Derivatives on own equity

IFRS US

In some cases, derivatives on own equity are Like IFRS, in some cases derivatives on own equity
required to be treated as derivatives (see chapter are required to be treated as derivatives. However,
7.3). [IAS 39.2(d)] the situations in which such treatment is required
under US GAAP differ in certain respects from IFRS
(see chapter 7.3). [815-10-15-74 - 15-78]

Embedded derivatives

Definition

IFRS US

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 7. Financial instruments (IFRS compared to US GAAP)

An 'embedded derivative' is a component of a hybrid Like IFRS, an 'embedded derivative' is one or more
(combined) contract that affects the cash flows of implicit or explicit terms in a host contract that affect
the hybrid contract in a manner similar to a stand- the cash flows of the contract in a manner similar to
alone derivative instrument. [IAS 39.10] a stand-alone derivative instrument. [815-10-20]

A derivative embedded in a host contract, including Like IFRS, a derivative embedded in a host contract,
leases and insurance contracts, is accounted for including leases and insurance contracts issued by
separately as a stand-alone derivative if the insurance companies, is accounted for separately as
following conditions are met: a stand-alone derivative if the following conditions
are met:
• the economic characteristics and
risks of the embedded derivative are • their economic characteristics and
not closely related to those of the risks are not clearly and closely
host contract; related to those of the host contract;
• a separate instrument with the same • a separate instrument with the same
terms as the embedded derivative terms as the embedded derivative
would meet the definition of a would meet the definition of a
derivative; and derivative; and
• the hybrid instrument is not • the hybrid (combined) instrument is
measured at fair value with changes not measured at fair value with
in fair value recognised in profit or changes in fair value recognised in
loss. [IAS 39.11] profit or loss. [815-15-25-1]

However, the determination of whether an

embedded derivative is clearly and closely related to
the host contract (see below), the definition of a
derivative (see above) and the circumstances in
which hybrid instruments are measured at fair value
with changes in fair value recognised in profit or loss
differ in certain respects from IFRS (see below).

When to separate

IFRS US

Determining whether an embedded derivative is Like IFRS, determining whether an embedded

closely related to the host contract requires the derivative is clearly and closely related to the host
nature - i.e. the economic risks and characteristics - contract requires the nature of the host contract and
of the host contract and the nature of the underlying the nature of the underlying of the derivative to be
of the derivative to be considered. If the natures of considered. If the natures of both the underlying and
both the underlying and the host contract are the host contract are similar, then they are generally
similar, then they are generally closely related. [IAS clearly and closely related. However, the US GAAP
39.11, AG30-AG33] guidance on the term 'clearly and closely related'
differs from IFRS in certain respects. [815-15-25-1,
25-16 - 25-19]

An interest rate derivative embedded in a debt Like IFRS, an interest rate derivative embedded in a
instrument or insurance contract would not generally debt instrument or insurance contract would not
be separated from its debt or insurance host generally be separated from its debt or insurance
contract unless the combined instrument can be host contract unless the combined instrument can be

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 7. Financial instruments (IFRS compared to US GAAP)

settled in such a way that the holder would not settled in such a way that the holder would not
recover substantially all of its recognised investment, recover substantially all of its recognised investment
or the embedded derivative could at least double the or the embedded derivative could at least double the
holder's initial rate of return on the host contract and holder's initial rate of return on the host contract and
could result in a rate of return that is at least twice could result in a rate of return that is at least twice
what the market return would be for a contract with what the market return would be for a contract with
the same terms as the host contract. [IAS 39.AG33 the same terms as the host contract. However,
(a)] because US GAAP has more guidance, differences
from IFRS may arise in practice. [815-15-25-26 -
25-31]

An insurance contract or a contract that is not a A contract that is not a financial instrument, and
financial instrument, and which is denominated in a which is denominated in a foreign currency, gives
foreign currency, gives rise to an embedded rise to an embedded derivative that is not
derivative that is not considered to be closely related considered to be clearly and closely related and
and therefore needs to be separated unless it is not therefore is separated unless the payments required
leveraged and does not contain an option feature, under the contract are denominated in one of the
and the payments required under the contract are following currencies:
denominated in one of the following currencies:
• the functional currency of one of the
• the functional currency of one of the substantial parties to the contract,
substantial parties to the contract; like IFRS;

• the currency in which the price of • the currency in which the price of
the related goods or services being the related goods or services being
delivered under the contract is delivered under the contract is
routinely denominated in commercial routinely denominated in commercial
transactions around the world; or transactions around the world, like
IFRS;
• the currency that is commonly used
in contracts to purchase or sell non- • a currency that a substantial party to
financial items in the economic the contract uses as if it were its
environment in which the transaction functional currency due to the
takes place.[IAS 39.AG33(d)] primary economic environment of
that substantial party being highly
inflationary, unlike IFRS; or
• a currency that is the local currency
of any substantial party to the
contract, unlike IFRS. [815-15-15-10
- 15-19]

For an insurance contract issued by an insurance

company in which losses are denominated in either
(1) the functional currency of one of the parties to
that contract (like IFRS) or (2) the local currency of
the country in which the loss is incurred, during the
period between the inception of the contract and the
loss occurrence date (unlike IFRS), there is no
embedded foreign currency derivative that requires
separate accounting. [815-15-15-20, 15-21]

In a cash collateralised debt obligation (CDO) Unlike IFRS, regardless of whether a collateralised
structure, the debt obligation is collateralised debt obligation (CDO) is a cash CDO or synthetic
through a pool of mortgages or other loans (cash CDO, the holder of an investment in a CDO does not

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 7. Financial instruments (IFRS compared to US GAAP)

instruments). In a synthetic CDO structure, the debt separate an embedded credit derivative as long as
obligation is collateralised through cash instruments the feature transfers credit risk in the form of
(generally government bonds) together with a pool subordination of one financial instrument to another,
of credit derivatives, including credit default swaps such as the subordination of one beneficial interest
and credit default options. In our view, the holder of to another tranche, thereby redistributing the credit
an investment in a cash CDO is not required to risk. [815-15-15-9]
separate an embedded credit feature if the exposure
is structured such that the embedded credit feature
meets the definition of a financial guarantee. In our
view, the credit feature embedded in a synthetic
CDO should be accounted for separately by the
holder.

The assessment of whether an embedded derivative Unlike IFRS, the evaluation of whether there is an
is required to be separated from the host contract embedded derivative that requires separation is
and accounted for as a derivative is made at made throughout the life of the contract, unless
inception of the contract - i.e. when the entity first otherwise limited by the derivatives codification topic
becomes a party to the contract. Subsequent - e.g. embedded foreign currency derivatives that
reassessment is prohibited unless there is either (1) meet one of the above exemptions from separation.
a change in the terms of the contract that [815-15-15-10]
significantly modifies the cash flows that would
otherwise be required under the contract; or (2) a
reclassification of a financial asset out of the fair
value through profit or loss category, in which case it
is required. [IFRIC 9.7]

Accounting for separable embedded derivatives

IFRS US

Separable embedded derivatives are measured at Like IFRS, separable embedded derivatives are
fair value, with all changes in fair value recognised required to be measured at fair value, with all
in profit or loss unless they form part of a qualifying changes in fair value recognised in profit or loss
cash flow or net investment hedging relationship unless they form part of a qualifying cash flow or net
(see chapter 7.7). [IAS 39.46-47, 55] investment hedging relationship (see chapter 7.7).
[815-15-30-1]

However, from an issuer's perspective, a separable Unlike IFRS, from an issuer's perspective a
embedded derivative feature that qualifies for equity separable embedded derivative feature that qualifies
classification is recognised in equity as the difference for equity classification is not generally bifurcated,
between the fair value of the combined instrument although it would require separation in certain
and the fair value of the liability component and is circumstances. However, an embedded beneficial
not remeasured subsequently. [IAS 32.31] conversion feature is separated and recorded at its
intrinsic value. Similarly, a conversion option in a
convertible debt instrument that, by its stated terms,
may be settled in cash (or other assets) on
conversion, including partial cash settlement, is
recorded as the difference between the proceeds
received and the fair value of the liability portion of
the convertible debt, unless the embedded
conversion option is required to be separately

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 7. Financial instruments (IFRS compared to US GAAP)

accounted for as a derivative under the derivatives

codification topic. It is not remeasured as long as it
continues to meet the conditions for equity
classification, like IFRS. [470-20-25-23, 25-25, 470-
20-30-3, 815-10-15-74]

The initial bifurcation of a separable embedded Like IFRS, the initial bifurcation of a separable
derivative does not result in any gain or loss being embedded derivative does not result in any gain or
recognised. [IAS 39.AG28, , IGC.1-IGC.2] loss being recognised. [815-15-30-2]

The carrying amount of the host contract at initial The carrying amount of the host contract at initial
recognition is generally the difference between the recognition is the difference between the proceeds
fair value of the hybrid instrument and the fair value (which would generally be fair value) of the hybrid
of the embedded derivative. [IAS 32.31, 39.13, instrument and the fair value of the embedded
AG28] derivative, like IFRS. However, the host contract is
recorded at fair value for debt instruments with a
conversion feature whose stated terms allow
settlement in cash (or other assets) on conversion,
including partial cash settlement, other than:
• those in which the embedded
conversion option is required to be
separately accounted for as a
derivative, like IFRS; and
• debt instruments issued with a
beneficial conversion feature, when
the carrying amount of the host
contract at initial recognition is the
difference between the proceeds
and the intrinsic value of the
embedded beneficial conversion
feature, unlike IFRS. [470-20-30-3,
815-15-25-51, 815-15-30-2]

If a single host contract has more than one Unlike IFRS, if a single host contract has more than
embedded derivative with different underlying risk one embedded derivative each of which would
exposures, that are readily separable and are warrant separate accounting as a derivative, then
independent of each other, then they are accounted those individual embedded derivatives are bundled
for separately. [IAS 39.AG29] together as a single, compound embedded derivative
instrument and accounted for separately from the
host contract. Therefore, an entity cannot embed a
compound derivative in a hybrid instrument and
separate that compound derivative into multiple
derivatives based on the dissimilar components,
unlike IFRS. [815-15-25-7, 25-8]

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 7. Financial instruments (IFRS compared to US GAAP)

7.3 Equity and financial liabilities

IFRS US

(IAS 1, IAS 10, IAS 32, IAS 39, IFRIC 17) (ASC Topic 815, ASC Subtopic 470-20, ASC Subtopic
480-10, ASC Subtopic 505-20, ASC Subtopic 505-30,
ASC Subtopic 810-10, ASC paragraph 480-10-S99-3,
ASR 268, CON6)

Overview

IFRS US

• An instrument, or its components, is • An instrument, or its components, is

classified on initial recognition as a classified on initial recognition as a
financial liability, a financial asset or financial liability, a financial asset or
an equity instrument in accordance an equity instrument in accordance
with the substance of the contractual with the applicable codification
arrangement and the definitions of a topics/subtopics, which may result in
financial liability, a financial asset differences from IFRS.
and an equity instrument.

• A financial instrument is a financial • Like IFRS, financial instruments that

liability if it contains a contractual can obligate the issuer to settle in
obligation to transfer cash or cash or by delivering another
another financial asset. financial asset are classified as
liabilities. Unlike IFRS, certain
securities with redemption features
that are outside the control of the
issuer that would not otherwise be
classified as liabilities are presented
as 'temporary equity'.

• A financial instrument is also • Unlike IFRS, a financial instrument is

classified as a financial liability if it a financial liability if it is
will or may be settled in a variable predominantly indexed to a fixed
number of the entity's own equity monetary amount known at
instruments. inception that will or may be settled
in a variable number of the entity's
own equity instruments. Unlike IFRS,
a financial instrument that only
conditionally obligates settlement in
a variable number of shares is
equity if other criteria are met.
Unlike IFRS, a financial instrument
that is predominantly indexed to the

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 7. Financial instruments (IFRS compared to US GAAP)

entity's own stock that is settleable

in a variable number of shares is
equity if other criteria are met.

• An obligation for an entity to acquire • Unlike IFRS, an obligation for an

its own equity instruments gives rise entity to acquire its own equity
to a financial liability, unless certain instruments creates a financial
conditions are met. liability only if it has certain
characteristics.

• As an exception to the general • Unlike IFRS, the accounting for a

principle, certain puttable puttable instrument depends on
instruments and instruments, or whether the entity is publicly or
components of instruments, that privately held and on whether it is
impose on the entity an obligation to conditionally or unconditionally
deliver to another party a pro rata puttable. Like IFRS, certain
share of the net assets of the entity instruments that can be required to
only on liquidation are classified as be redeemed only in the event of the
equity instruments if certain liquidation of the issuer are equity;
conditions are met. however, the conditions for such
treatment differ from IFRS.

• The contractual terms of preference • Like IFRS, an instrument issued in

shares and similar instruments are the legal form of a preferred share
evaluated to determine whether they and similar instruments may be, in
have the characteristics of a whole or in part, a liability based on
financial liability. an analysis of the contractual terms
of the instrument. However,
differences between IFRS and US
GAAP exist in treating preferred
shares as liability, equity or
temporary equity.

• The components of compound • Unlike IFRS, instruments with

financial instruments, which have characteristics of both liability and
both liability and equity equity are not always split between
characteristics, are accounted for their liability and equity components;
separately. and when they are, the basis of
separation may differ from IFRS.

• A non-derivative contract that will be • Unlike IFRS, a non-derivative

settled by an entity delivering its contract in the form of a share that
own equity instruments is an equity the issuer must or may settle by
instrument if, and only if, it is issuing a variable number of its
settleable by delivering a fixed equity shares is recorded as equity,
number of its own equity unless it is known at inception that
instruments. the monetary value of the obligation
is based solely or predominantly on
a fixed monetary amount; will vary
based on something other than the
fair value of the issuer's equity
shares; or will vary inversely related
to changes in the fair value of the

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 7. Financial instruments (IFRS compared to US GAAP)

issuer's equity shares.

• A derivative contract that will be • Derivative instruments indexed to an

settled by the entity delivering a entity's own stock that will be settled
fixed number of its own equity by the entity delivering a fixed
instruments for a fixed amount of number of own equity instruments
cash is an equity instrument. If such for a fixed amount of cash may meet
a derivative contains settlement the definition of equity; however, the
options, then it is an equity criteria for determining whether they
instrument only if all settlement meet the definition of equity or
alternatives lead to equity liability differ from IFRS.
classification. Additionally, US GAAP contains more
guidance on what constitutes
'indexed to an entity's own stock'.
Also, derivative instruments indexed
to an entity's own stock may be
treated as equity if they can be net
share settled if certain criteria are
met, unlike IFRS.

• Incremental costs that are directly • Like IFRS, incremental costs that are
attributable to issuing or buying back directly attributable to issuing or
own equity instruments are buying back an entity's own equity
recognised directly in equity. instruments are recognised directly
in equity.

• Treasury shares are presented as a • Like IFRS, treasury shares are

deduction from equity. presented as a deduction from
equity.

• Gains and losses on transactions in • Like IFRS, gains and losses on

an entity's own equity instruments transactions in own equity
are reported directly in equity. instruments are reported directly in
equity.

• Dividends and other distributions to • Like IFRS, dividends and other

the holders of equity instruments, in distributions to the holders of equity
their capacity as owners, are instruments, in their capacity as
recognised directly in equity. owners, are recognised directly in
equity.

• Non-controlling interests are • Like IFRS, non-controlling interests

classified within equity, but are classified within equity, but
separately from equity attributable separately from equity attributable
to shareholders of the parent. to shareholders of the parent.

Classification as a financial liability or equity

General principles

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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

An instrument is a financial liability if it is: Although there are requirements for certain types of
instruments that result in the same classifications as
• a contractual obligation: IFRS, there are many requirements under US GAAP
- to deliver cash or other financial that result in a different treatment from IFRS.
assets; or Therefore, many instruments that are liabilities
under IFRS could be classified as equity or
- to exchange financial assets or 'temporary equity' (which is between total liabilities
financial liabilities with another and equity) under US GAAP and certain instruments
entity under potentially that are equity under IFRS could be classified
unfavourable conditions (for the outside equity under US GAAP (i.e. as temporary
issuer of the instrument); or equity or as a liability).
• a contract that that will or may be
settled in the entity's own equity
instruments and is:
- a non-derivative that comprises
an obligation for the entity to
deliver a variable number of its
own equity instruments; or
- a derivative that will or may be
settled other than by the entity
exchanging a fixed amount of
cash or other financial assets for
a fixed number of its own equity
instruments. [IAS 32.11, 15-20]

Any instrument that an issuer could be obliged to Under US GAAP, financial liabilities include:
settle in cash, or by delivering other financial assets,
is a financial liability regardless of the financial ability • mandatorily redeemable shares
of the issuer to settle the contractual obligation or issued by a public entity that embody
the probability of settlement. [IAS 32.19, IU 11-06] an unconditional obligation requiring
the issuer to redeem it by
transferring assets at a specified or
determinable date (or dates) or on
an event that is certain to occur, like
IFRS;
• shares issued by a public or non-
public entity that are mandatorily
redeemable on fixed dates for
amounts that are either fixed or
determinable with reference to an
interest rate, currency or other
external index, like IFRS;

An equity instrument is an instrument that meets • an instrument that is not itself an

both of the following conditions: outstanding share that, at inception,

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 7. Financial instruments (IFRS compared to US GAAP)

embodies an obligation for the

• There is no contractual obligation to issuer to repurchase its own equity
deliver cash or another financial shares, or is indexed to such an
asset to another party, or to obligation, and requires or may
exchange financial assets or require the issuer to settle the
financial liabilities with another party obligation by transferring assets
under potentially unfavourable (e.g. a forward purchase contract or
conditions (for the issuer of the written put option on the issuer's
instrument). equity shares that is to be physically
• If the instrument will or may be settled or net cash-settled), like
settled in the issuer's own equity IFRS; and
instruments, then it is either: • like IFRS, an instrument that
- a non-derivative that comprises embodies an unconditional obligation
an obligation for the issuer to or, for an instrument that is not itself
deliver a fixed number of its own an outstanding share that embodies
equity instruments; or a conditional obligation, that the
issuer must or may settle by issuing
- a derivative that will be settled a variable number of its equity
only by the issuer exchanging a shares, if at inception the monetary
fixed amount of cash or other value of the obligation is based
financial assets for a fixed solely or predominantly on:
number of its own equity
instruments. [IAS 32.11, 16, 19, - a fixed monetary amount known
IU 11-06] at inception (e.g. a payable to be
settled with a variable number of
the issuer's equity shares);
- variations in something other
than the fair value of the issuer's
equity shares (e.g. a financial
instrument indexed to the S&P
500 and to be settled with a
variable number of the issuer's
equity shares); or
- variations inversely related to
changes in the fair value of the
issuer's equity shares (e.g. a
written put option that could be
net share settled). [480-10-20,
480-10-25-8, 25-14]
Because IFRS does not have such prescriptive
guidance, differences from IFRS may arise in
practice.

In general, an 'equity instrument' is any contract that Like IFRS, in general, an 'equity instrument' is any
evidences a residual interest in the assets of an contract that evidences a residual interest in the
entity after deducting all of its liabilities. assets of an entity after deducting all of its liabilities.
However, application of the codification
topics/subtopics results in differences from IFRS for
certain instruments.

An obligation may arise from a requirement to repay Unlike IFRS, the above liability classifications are
principal or to pay interest or dividends. A perpetual based on a requirement to repay the principal; a

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 7. Financial instruments (IFRS compared to US GAAP)

instrument with an obligation to pay dividends or requirement to pay interest or dividends may not
interest is a liability and the principal is assumed to result in the entire instrument being classified as a
be equal to the net present value of the dividend or liability because it is only one factor to consider in
interest obligation. [IAS 32.AG6] determining its classification.

Instruments or components of instruments are either Unlike IFRS, SEC registrants present redeemable
a liability or equity; there is no midway classification preferred shares and redeemable non-controlling
between liabilities and equity. [IAS 32.15-16] interests that would otherwise be equity (see
above), and other redemption features that are
bifurcated and accounted for separately, whose
redemption is outside the control of the issuer, in
temporary equity. [480-10-S99]

The classification of an instrument as a liability or as Like IFRS, the classification of a financial instrument
equity is made on initial recognition. However, a as a liability or as equity is made on initial
reclassification may be required if: an entity amends recognition. Like IFRS, a reclassification may be
the contractual terms of an instrument; the effective required if an entity amends the contractual terms of
terms of an instrument change without any an instrument. [470-50-40-6]
amendment of the contractual terms; there is a
relevant change in the composition of the reporting
entity; or, in the case of puttable instruments and
instruments that impose on the entity an obligation
only on liquidation, if certain conditions are met.
[IAS 32.15, 16E]

Contingent settlement provisions

IFRS US

An instrument that contains contingent settlement Unlike IFRS, US GAAP has specific guidance on
provisions is a financial liability because the issuer conditional (contingent) obligations that specify the
does not have the unconditional right to avoid conditions to be met for the issuer to conclude that it
making payments unless one of the following controls the form of settlement in order to classify
applies: the instruments as equity. Examples include the
following.
• the part of the contingent settlement
provision that could require • Conditionally redeemable shares are
settlement in cash or another not liabilities unless and until they
financial asset is not genuine; or become mandatorily redeemable,
unlike IFRS. Also, SEC registrants
• the issuer can be required to settle treat conditionally redeemable
in cash or another financial asset shares in temporary equity, unlike
only in the event of its own IFRS.
liquidation. [IAS 32.25]
• Instruments are not liabilities if the
settlement in cash or another
financial asset can be required only
in the event of the liquidation of the
issuer, like IFRS. [480-10-25-4, 25-
5]

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 7. Financial instruments (IFRS compared to US GAAP)

Puttable instruments

IFRS US

A 'puttable instrument' is a financial instrument that Unlike IFRS, if the puttable instruments are in the
gives the holder the right to put the instrument back form of shares (i.e. the put option is embedded in
to the issuer for cash or another financial asset or is the share) but they do not meet the definition of
automatically put back to the issuer on the mandatorily redeemable shares (see above), then:
occurrence of an uncertain future event or the death
or retirement of the holder. Puttable instruments are • they are classified as temporary
generally classified as financial liabilities of the equity by SEC registrants; and
issuer, unless certain conditions are met. [IAS • they may be classified as equity by
32.16A] non-SEC registrants. [480]

A puttable instrument is classified as an equity

instrument if all of the following conditions are met:
• the instrument entitles the holder to
a pro rata share of the entity's net
assets in the event of the entity's
liquidation;
• the instrument belongs to a class of
instruments that is subordinated to
all other classes of instruments
issued by the entity. In determining
whether an instrument is in the most
subordinated class, an entity
evaluates the instrument's claim on
liquidation as if it were to liquidate
on the date when it classifies the
instrument;

• all financial instruments in this most

subordinated class of instruments
have identical features (i.e. no
instrument holder in that class can
have preferential terms or
conditions);
• apart from the contractual obligation
to repurchase or redeem the
instrument, the instrument does not
include any other contractual
obligation to deliver cash or another
financial asset to another entity, or
to exchange financial assets or
financial liabilities with another entity
under conditions that are potentially
unfavourable to the entity; and
• the total expected cash flows
attributable to the instrument over
its life are based substantially on the

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 7. Financial instruments (IFRS compared to US GAAP)

profit or loss, the change in the

recognised net assets or the change
in the fair value of the recognised
and unrecognised net assets of the
entity. Profit or loss and the change
in recognised net assets are
measured in accordance with IFRS
for this purpose. [IAS 32.16A,
AG14B-AG14E]

In addition to the above conditions to be met by the

instrument, the issuer must not have other financial
instrument or contract that has:
• total cash flows based substantially
on the profit or loss, the change in
the recognised net assets or the
change in the fair value of the
recognised and unrecognised net
assets of the entity; and
• the effect of substantially restricting
or fixing the residual return to the
puttable instrument holders. [IAS
32.16B]

Some financial instruments include a contractual Like IFRS, certain instruments that can be required
obligation for the issuing entity to deliver to another to be redeemed only in the event of the liquidation of
entity a pro rata share of its net assets only on the issuer are treated as equity. However, the
liquidation. The obligation arises because liquidation conditions for such treatment differ from IFRS. [480]
either is certain to occur and is outside the control of
the entity - e.g. a limited life entity - or is uncertain
to occur but is at the option of the instrument holder.
Such instruments are classified as equity if certain
conditions are met (see below). [IAS 32.16C]

As an exception to the definition of a financial

liability, an instrument (or a component of an
instrument) that includes such an obligation is
classified as equity if it has all of the following
features:
• the instrument entitles the holder to
a pro rata share of the entity's net
assets in the event of the entity's
liquidation;
• the instrument belongs to a class of
instruments that is subordinated to
all other classes of instruments
issued by the entity. In determining
whether an instrument is in the most
subordinated class, an entity
evaluates the instrument's claim on
liquidation as if it were to liquidate
on the date when it classifies the
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 7. Financial instruments (IFRS compared to US GAAP)

instrument; and

• all financial instruments in this most

subordinated class of instruments
have an identical contractual
obligation for the entity to deliver a
pro rata share of its net assets on
liquidation. [IAS 32.16C, AG14B]

In addition to the instrument having all the above

features to be classified as an equity instrument, the
issuer should have no other financial instrument or
contract that has:
• total cash flows based substantially
on the profit or loss, the change in
the recognised net assets or the
change in the fair value of the
recognised and unrecognised net
assets of the entity; and
• the effect of substantially restricting
or fixing the residual return to the
instrument holders. [IAS 32.16D]

Impact of share settlement

IFRS US

If a non-derivative contract will or may be settled in Unlike IFRS, the classification of instruments that will
the issuer's own equity instruments, then it is a or may require delivery of a variable number of
liability if it includes a contractual obligation for the shares depends on the predominant nature of the
issuer to deliver a variable number of its own equity monetary value of the instrument, and other factors
instruments. [IAS 32.11, 16(b)(i), 21, AG27(d)] that are used to evaluate whether the entity has the
ability to settle net in shares. [480-10-25-14]

If a derivative contract will be settled by the entity Like IFRS, a derivative contract that will be settled
receiving or delivering a fixed number of own equity only by exchanging a fixed number of own equity
shares for a fixed amount of cash or another shares for a fixed amount of cash or other financial
financial asset, then it is an equity instrument of the assets and that requires gross physical settlement is
entity. [IAS 32.11, 16(b)(ii)] generally classified as equity. However, unlike IFRS,
under US GAAP there are additional criteria to be
considered before concluding that equity
classification is appropriate. For example, the
financial instrument should be considered indexed to
the reporting entity's own stock (shares) and US
GAAP provides detailed guidance on evaluating
'indexed to its own stock'. Therefore, derivative
instruments may be classified differently from IFRS.
[815-40-15-7, 15-7C]

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 7. Financial instruments (IFRS compared to US GAAP)

If a derivative financial instrument gives one party a Like IFRS, derivative contracts that give the
choice over how it is settled - e.g. the issuer or the counterparty a choice of settlement by physical
holder can choose settlement net in cash or by delivery, net-shares or net-cash delivery, are
exchanging shares for cash - then it is a financial liabilities or assets. However, unlike IFRS, derivative
asset or financial liability unless all of the settlement contracts that can be settled net in shares are equity
alternatives result in it being an equity instrument. if they are indexed to the entity's own equity
[IAS 32.26] instruments and the entity has the ability to settle
net in shares. [815-40 25-4]

Contracts that may be settled in a variable number Like IFRS, contracts that may be settled in a variable
of the entity's own equity shares equivalent to a number of the entity's own equity shares equivalent
fixed value are financial liabilities or financial assets. to a fixed value are financial liabilities or financial
[IAS 32.11, 16(b)(ii)] assets. [815-40-25-26]

Equity instruments include options and warrants on Like IFRS, equity instruments include options and
an entity's own equity if they meet certain warrants on an entity's own equity if they meet
conditions. [IAS 32.11] certain conditions. However, these conditions differ
from IFRS. For example, a contract should be
indexed to the reporting entity's own shares to be
equity-classified. US GAAP provides detailed
guidance on evaluating 'indexed to its own stock' and
'classified in stockholder's equity'. [815-40-15-7]

A contract that will be settled by the entity receiving Unlike IFRS, a contract that will be settled by the
or delivering a fixed or variable number of puttable entity receiving or delivering a fixed or variable
instruments, or instruments that impose on the number of puttable instruments or instruments that
entity an obligation to deliver to another party a pro oblige the entity to deliver a pro rata share of the
rata share of the net assets of the entity only on net assets of the entity only on liquidation, is
liquidation is a financial asset or a financial liability. evaluated using the above considerations and
[IAS 32.11] differences from IFRS may arise in practice.

Redemption options

IFRS US

An instrument may be redeemable at the option of An instrument that is redeemable at the option of
the issuer but, through its terms and conditions, may the issuer may establish an obligation indirectly for
establish an obligation indirectly for the issuer to the issuer to transfer cash or other financial
transfer cash or other financial instruments to the instruments to the holder. However, the
holder. In such cases, the instrument is a liability. requirements under US GAAP for making this
[IAS 32.20] evaluation (see above) differ from IFRS, so
differences may arise in practice.

Classification of rights issues

IFRS US

Rights (and similar derivatives) to acquire a fixed Unlike IFRS, rights (and similar derivatives) to

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 7. Financial instruments (IFRS compared to US GAAP)

number of an entity's own equity instruments for a acquire a fixed number of an entity's own equity
fixed price stated in a currency other than the instruments for a fixed price stated in a currency
entity's functional currency are equity instruments, other than the entity's functional currency are a
provided that the entity offers the rights pro rata to financial liability because these rights are not
all of its existing owners of the same class of its considered indexed to the entity's own stock. [815-
non-derivative equity instruments. [IAS 32.16(b)(ii)] 40-15-7C]

Compound instruments

IFRS US

An instrument that contains both liability and equity Unlike IFRS, instruments with characteristics of both
elements - e.g. a convertible bond or convertible liability and equity, such as convertible bonds, are
preference shares - is a compound instrument. not required to be split between their liability and
Compound instruments are allocated between their equity components in all circumstances. The
liability and equity components (split accounting). following are examples of circumstances in which
[IAS 32.28-29, AG31] split accounting of a compound instrument is
required:
• a convertible debt that may be
wholly or partly settled in cash (or
other assets) on conversion, if the
conversion option qualifies for equity
treatment;
• a conversion option that is in-the-
money - i.e. beneficial conversion
feature - at the date of issue; and
• a conversion option that is not
clearly and closely related to the
host and, if it were a freestanding
derivative instrument, would meet
the definition of a derivative and not
qualify for equity classification. [815-
15-25-1]

Unlike IFRS, debt securities with non-detachable

warrants are treated entirely as liabilities if the
warrants are not required to be separated from the
liability host under other codification subtopics. [815]

The carrying amount of a compound instrument is Unlike IFRS, not all such compound instruments are
allocated between its liability and equity components separated. Unlike IFRS, beneficial conversion
on initial recognition as follows. features contained within a compound instrument
are separated at their intrinsic value. For other
• The amount allocated to the liability compound instruments that are required to be
element is the present value of the separated into liability and equity components -
future interest and principal cash other than debt with detachable warrants - the
flows, discounted at a rate allocation between their liability and equity
applicable to a similar liability components on initial recognition is as follows, like
without an equity component. The IFRS.
value of any embedded derivatives,

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 7. Financial instruments (IFRS compared to US GAAP)

other than the equity feature - the • The amount allocated to the liability
embedded call represented by the element is the present value of the
conversion feature - is included in future interest and principal cash
the amount allocated to the liability. flows, discounted at a rate
applicable to a similar liability
• The remaining issue proceeds are without an equity component. The
allocated to the equity element. [IAS value of any embedded derivatives,
32.31-32] other than the equity feature - the
embedded call represented by the
conversion feature - is included in
the amount allocated to the liability.
• The remaining issue proceeds are
allocated to the equity element.
[470-20-25-2]

On early redemption of a convertible instrument, the If US GAAP requires the initial proceeds on a
redemption payment is allocated to the liability and convertible instrument to be allocated between a
equity components using the method initially used to liability component and an equity component such
allocate the instrument between its liability and that the liability component is initially recorded at its
equity components. [IAS 32.AG33] fair value and the equity component is recorded at
the residual amount of the proceeds, then the
redemption payment is allocated between its liability
and equity components using this same method, like
IFRS. However, unlike IFRS, in other circumstances
the allocation is performed as follows.
• If the intrinsic value of the beneficial
conversion feature was recognised
previously, then a portion of the
redemption price is allocated to the
beneficial conversion feature as a
reduction to paid-in capital based on
its intrinsic value on the date of
extinguishment. The remainder of
the redemption price is allocated to
the liability component to determine
the gain or loss on extinguishment.
• If the compound instrument did not
require separation of the conversion
feature, then the redemption
payment is treated in its entirety as
the retirement of liability with the
gain or loss recognised in profit or
loss. [470-20-40-3, 40-20]

Accounting for conversion at maturity

IFRS US

On conversion of a compound instrument, the entity Like IFRS, on conversion of a compound instrument
derecognises the liability component, which is for which the conversion option was previously

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 7. Financial instruments (IFRS compared to US GAAP)

extinguished when the conversion feature is separated from the liability host, the entity
exercised, and recognises that amount as equity. derecognises the liability component, which is
The original equity component remains as equity. No extinguished when the conversion feature is
gain or loss is recognised in profit or loss. [IAS exercised, and recognises the carrying amount of
32.AG32] the liability as equity. Unlike IFRS, any remaining
discount on the liability is recognised as interest
expense in profit or loss. Like IFRS, any original
equity component remains in equity. [470-20-40-1,
40-20]

Unlike IFRS, if the conversion option was not

separated from the liability host, then the carrying
amount of the debt is reclassified from liability to
equity on conversion of the convertible instrument,
with no gain or loss recognised in profit or loss.
[470-20-40-4]

Recognition and measurement

IFRS US

The recognition and measurement of financial The recognition and measurement of financial
liabilities is discussed in chapters 7.5 and 7.6. The liabilities is discussed in chapters 7.5 and 7.6. The
remainder of this chapter focuses on equity. remainder of this chapter focuses on equity.

IFRS does not have any specific measurement US GAAP contains more specific guidance on the
requirements related to equity, other than in respect measurement of equity than IFRS; these general
of splitting compound instruments, the cost of equity requirements apply to all equity transactions other
transactions, treasury shares, and equity than share-based payments with employees (see
instruments that are issued in share-based payment chapter 4.5). Under US GAAP, equity instruments are
transactions (see chapter 4.5). [IAS 39.2(d)] generally recognised at fair value on initial
recognition or, in certain circumstances, using an
allocation based on relative fair value or intrinsic
value, at the date of issue. Because US GAAP
contains more specific guidance than IFRS,
differences may arise in practice. [480-10-15-8]

An entity may be owed an amount in respect of a Unlike IFRS, a note receivable that is received in
contribution for new equity shares that already have exchange for the issue of an equity instrument is
been issued. In our view, the equity and a generally treated as a deduction from equity rather
corresponding receivable are recognised if the than as an asset. [505-10-45]
receivable meets the definition of a financial asset.
This requires the entity to have a contractual right to
receive the amount at the reporting date. A
'contractual right' is more than an informal
agreement or a non-contractual commitment.

As a general principle, the definitions of income and Like IFRS, the definitions of income and expenses
expenses exclude transactions with holders of equity exclude transactions with holders of equity
instruments acting in that capacity. Therefore, gains instruments in their capacity as owners. Therefore,

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 7. Financial instruments (IFRS compared to US GAAP)

or losses on transactions in the entity's own equity like IFRS, gains or losses on transactions in the
are not recognised in profit or loss. The effects of entity's own equity are not recognised in profit or
transactions with owners are recognised in equity. loss; these amounts are recognised in equity. Like
However, derivatives on own equity that are IFRS, derivatives on own equity that are classified as
classified as assets or liabilities (see above) result in assets or liabilities (see above) result in gains and
gains and losses recognised in profit or loss. losses recognised in profit or loss. [815]

There is no specific guidance under IFRS on how to Unlike IFRS, there is specific guidance under US
account for an issue of bonus shares to shareholders GAAP to distinguish share dividends from share split:
or distribution of shares in lieu of dividends (with or
without a cash alternative). In our view: • If a transaction meets the definition
of a share split, then there is no
• in the case of a simple split of requirement to adjust total equity or
shares or a bonus issue, there is no an individual component of equity,
requirement to adjust total equity or like IFRS.
an individual component of equity;
• If a transaction meets the definition
• when shares with a value equal to of a share dividend, then an entity
the cash dividend amount are transfers from retained earnings to
offered as an alternative to the cash capital stock and to additional paid-
dividend, it is acceptable to debit the in capital an amount equal to the fair
liability and recognise a credit to value of the additional shares
equity as the proceeds of the issue; issued, unlike IFRS. [505-20-25-3]
and
• when a share dividend is not an
alternative to cash dividend, no
accounting entries are required.

Because US GAAP has specific guidance, differences

from IFRS may arise in practice.

Treasury shares

IFRS US

Any amounts paid by an entity to acquire its own Like IFRS, treasury shares are accounted for directly
shares are debited directly to equity. This applies in equity, with treasury shares held for reissue
whether the shares are cancelled immediately or presented as a deduction from equity; any difference
held for resale - i.e. treasury shares. Amounts between the purchase price and reissue proceeds
received from the sale of treasury shares are does not impact income. On reissue, the
credited directly to equity. No gains or losses are classification within equity of gains or losses on
recognised in profit or loss on any transactions in share transactions differs based on the comparison
own shares and changes in the value of treasury of proceeds received to original cost. If the proceeds
shares are not recognised, even if these shares are from the sale of the treasury shares are greater
held for trading purposes. [IAS 32.33, AG36] than the cost of the shares sold, then the entity
recognises the excess proceeds as additional paid-in
capital. If the proceeds from the sale of the treasury
shares are less than the original cost of the shares
sold, then, generally, the excess cost first reduces
any additional paid-in capital arising from previous
sales of treasury shares for that class of share, and

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 7. Financial instruments (IFRS compared to US GAAP)

any remaining excess is recognised as a reduction of

retained earnings. [505-30-30-6, 30-10]

Own shares held in connection with an equity Like IFRS, treasury share accounting also applies to
compensation plan held by the entity are presented own shares that will be used to satisfy obligations
as treasury shares. [IAS 32.4(f), 33-34] under employee share-based payment plans (see
chapter 4.5) unless the plan constitutes an employee
share ownership plan (ESOP), in which case specific
provisions apply such that allocated shares cannot
be treated as treasury shares, so differences from
IFRS may arise in practice. [505-30-15-1, 718-40-
25-10]

Treasury shares, including those held for trading Like IFRS, treasury shares, including those held for
purposes, may not be recognised as assets or trading purposes, may not be recognised as assets
measured at fair value with gains and losses or measured at fair value with gains and losses
recognised in profit or loss. [IAS 32.33, AG36] recognised in profit or loss. [505-30]

An associate may have an investment in its investor. Unlike IFRS, the carrying amount of an equity-
IFRS does not provide specific guidance on whether method investee (associate) that has an investment
the carrying amount of the associate under the in the investor is adjusted in the investor's financial
equity method should include the investor's share of statements to show the amount related to the
the associate's investment in the investor's own investee's investment in the investor as treasury
shares. However, in our view the investor is not shares.
required to make any adjustments. [IAS 1.79, 32.33]

Cost of an equity transaction

IFRS US

Qualifying costs attributable to an equity transaction Like IFRS, qualifying costs attributable to an equity
- e.g. issuing or buying back own shares - are transaction - e.g. issuing or buying back own shares
debited directly to equity, net of any tax effects. [IAS - are debited directly to equity, net of any tax
32.35] effects. [505-10-25-2]

A listing of existing shares, a secondary offering, Like IFRS, a listing of existing shares, a secondary
share splits and share dividends do not result in new offering, share splits and share dividends do not
equity instruments being issued; therefore, any costs result in additional proceeds or new equity
associated with such transactions are expensed as instruments being issued; therefore, any costs
they are incurred. [IU 09-08] associated with such transactions are expensed as
they are incurred, like IFRS.

Captions within equity

IFRS US

IFRS does not include requirements for the Like IFRS, US GAAP does not include extensive

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 7. Financial instruments (IFRS compared to US GAAP)

presentation of separate captions within equity, requirements for the presentation of separate
except that the following are included in OCI: captions within equity, and differences from IFRS
may arise in practice. The following are included in
• foreign currency translation reserve accumulated OCI:
(see chapter 2.7);
• foreign currency translation
• asset revaluation reserve for adjustments (see chapter 2.7), like
property, plant and equipment and IFRS;
intangible assets (see chapters 3.2
and 3.3); • cash flow hedging reserve (see
chapter 7.7), like IFRS;
• cash flow hedging reserve (see
chapter 7.7); • unrealised gains and losses on
available-for-sale securities (see
• remeasurement of available-for-sale chapter 7.6), like IFRS; and
financial assets (see chapter 7.6);
and • actuarial gains and losses on defined
benefit plans, like IFRS (see chapter
• immediate recognition of actuarial 4.4) and, unlike IFRS, prior service
gains and losses on defined benefit costs on defined benefit plans.
plans (see chapter 4.4). [IAS 1.7]

Unlike IFRS, assets such as property, plant and

equipment and intangible assets are not revalued
(see chapters 3.2 and 3.3).

NCI are presented within equity separately from Like IFRS, NCI are classified as equity but are
equity of the parent's shareholders. [IAS 1.54, 106, presented separately from the parent's equity. [810-
IFRS 10.22] 10-45-16]

Dividends

IFRS US

Dividends and other distributions to holders of equity Like IFRS, dividends and other distributions to
instruments are recognised directly in equity. [IAS holders of equity instruments are recognised directly
32.35] in equity.

A liability for dividends is not recognised until the Like IFRS, a liability for dividends is not recognised
entity has an obligation to pay dividends, which is until the entity has an obligation to pay dividends,
generally not until they are declared or approved, if which is generally not until they are declared or
approval is required (see chapter 2.9). [IAS 10.12] approved, if approval is required (see chapter 2.9).

Dividends on shares, or components of shares, that Like IFRS, dividends on shares that are classified as
are liabilities are recognised in profit or loss as a liabilities are recognised in profit or loss as a
financing cost, even if the legal form of the payment financing cost, even if the legal form of payment is a
is a dividend unless the dividends are discretionary. dividend). Like IFRS, financing costs on shares, or
Financing costs on shares, or components of shares, components of shares, that meet the definition of a
that are liabilities are determined using the effective liability are determined using the effective interest
interest method (see chapter 7.6). [IAS 32.35] method (see chapter 7.6).

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 7. Financial instruments (IFRS compared to US GAAP)

Distributions of non-cash assets to owners

IFRS US

There is specific guidance in respect of non- Like IFRS, there is specific guidance in respect of
reciprocal distributions to shareholders in which all non-reciprocal distributions to shareholders in which
shareholders of the same class are treated equally; all shareholders of the same class are treated
however, the guidance does not apply to common equally. Unlike IFRS, the guidance also applies to
control transactions (see chapter 5.13) or to common control transactions (see chapter 5.13).
distributions of part of the ownership interests in a Like IFRS, the guidance does not apply to
subsidiary when control is retained (see chapter distributions of part of the ownership interests in a
2.5). [IFRIC 17.3-7] subsidiary when control is retained (see chapter
2.5). [810-10-65, 845-30-10 - 30-14]

Distributions in the scope of the guidance, including Unlike IFRS, under US GAAP spin-offs are accounted
spin-offs and demergers (see chapter 2.5), are for on the basis of book values (with no gain or loss
accounted for on a fair value basis and any gain, recognised) when there is a pro rata distribution to
representing the excess of the fair value of the owners. [810-10-40-5, 845-10-30-10 - 30-14]
assets distributed over their book value, is
recognised in profit or loss on the date of
settlement. [IFRIC 17.11]

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 7. Financial instruments (IFRS compared to US GAAP)

7.4 Classification of financial assets and financial liabilities

IFRS US

(IAS 39) (ASC Subtopic 310-10 and 20; ASC Subtopic 320-
10; ASC Subtopic 325-20; ASC Subtopic 405-20;
ASC Topic 450; ASC Subtopic 460-10; ASC Subtopic
470-20, 50, and 60; ASC Subtopic 480-10; ASC
Subtopic 505-10, ASC Subtopic 810-10; ASC
Subtopic 815-10, 15, and 25; ASC Subtopic 820-10;
ASC Subtopic 825-10; ASC Subtopic 830-20; ASC
Topic 840; ASC Topic 860; ASC Subtopic 940-320;
ASC Subtopic 946-320 and 830; ASC Subtopic 948-
10; SAB Topic 5-M; SAB Topic 6-L)

Overview

IFRS US

• Financial assets are classified into • Unlike IFRS, US GAAP does not have
one of four categories: at fair value categories for all financial
through profit or loss; loans and instruments. However, like IFRS, it
receivables; held-to-maturity; or does have the following categories
available-for-sale. Financial liabilities for debt and marketable equity
are categorised as either at fair securities: held-for-trading,
value through profit or loss, or other available-for-sale and held-to-
liabilities. The categorisation maturity. Unlike IFRS, these
determines whether and where any categories do not include equity
remeasurement to fair value is securities not quoted in an active
recognised. market, which are measured at cost
unless the fair value option is
elected. Loans are either measured
at amortised cost or classified as
held-for-sale, unlike IFRS. Unlike
IFRS, US GAAP does not prescribe
classification categories for financial
liabilities. Like IFRS, categorisation
determines whether and where any
re-measurement to fair value is
recognised.

• Financial assets and financial • Like IFRS, certain financial assets

liabilities classified at fair value and financial liabilities can be
through profit or loss are further classified as held-for-trading or
subcategorised as held-for-trading designated as at fair value through
(which includes derivatives) or profit or loss. However, the eligibility

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 7. Financial instruments (IFRS compared to US GAAP)

designated as at fair value through criteria and financial assets and

profit or loss on initial recognition. financial liabilities to which the fair
value option can be applied differ
from IFRS in certain respects.

• Items may not be reclassified into • Unlike IFRS, securities may be

the fair value through profit or loss reclassified into the trading category
category after initial recognition. in certain rare circumstances.

• An entity may reclassify a non- • Like IFRS, an entity may reclassify a

derivative financial asset out of the security out of the held-for-trading
held-for-trading category in certain category but, unlike IFRS, such
circumstances if it is no longer held reclassification is linked to rare
for the purpose of being sold or circumstances.
repurchased in the near term.

• An entity may also reclassify a non- • Also like IFRS, an entity may
derivative financial asset from the reclassify a security out the
available-for-sale category to loans available-for-sale category on a
and receivables if certain conditions change in intent. Additionally, an
are met. entity may reclassify a loan out of
the loans held-for-sale category in
certain circumstances.

• Other reclassifications of non- • Other reclassifications of non-

derivative financial assets may be derivative financial assets may be
permitted or required if certain permitted or required, but the
criteria are met. criteria may differ from IFRS in
certain respects.

• Reclassifications or sales of held-to- • Like IFRS, reclassifications or sales

maturity assets may require other of held-to-maturity assets may
held-to-maturity assets to be require other held-to-maturity assets
reclassified as available-for-sale. to be reclassified as available-for-
sale.

• The first chapters of a forthcoming • The FASB is also in the process of

standard on financial instruments, revising its financial instruments
which deals with the classification accounting. However, no revised
and measurement of financial assets standard has yet been issued.
and financial liabilities, derecognition
and fair value, are effective for
annual periods beginning on or after
1 January 2015. However, the IASB
have tentatively decided to postpone
the effective date at the date of this
publication being issued. For a
discussion of the forthcoming
requirements, see chapter 7A.

Classification

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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

All financial instruments - i.e. not just securities - Unlike IFRS, the classification of financial
are classified into one of the following categories on instruments is not generally prescribed other than
initial recognition: for investments in debt and marketable equity
securities, which are classified as:
• financial assets or financial liabilities
measured at fair value through profit • trading;
or loss (the 'fair value through profit
or loss' category); • held-to-maturity; or

• held-to-maturity investments; • available-for-sale. [320-10-25-1,

948-310-35-1]
• loans and receivables;
• available-for-sale financial assets; or
Loans are either measured at amortised cost, like
• other liabilities. [IAS 39.9, 45, 47] IFRS, or classified as held-for-sale, unlike IFRS. Also
unlike IFRS, debt securities not quoted in an active
Investments in equity instruments that do not have a market cannot be measured at amortised cost
quoted market price in an active market and whose unless they are classified as held-to-maturity. Unlike
fair value cannot be reliably measured are measured IFRS, non-marketable equity securities are
at cost. measured at cost unless the fair value option is
elected on initial recognition (see below).
Unlike IFRS, US GAAP does not prescribe
classification categories for financial liabilities.
Like IFRS, financial instruments can be designated at
fair value through profit or loss (see below).

There are no special requirements for financial Unlike IFRS, financial institutions - including banks,
institutions and other entities that engage in credit unions, finance companies, mortgage
transactions that involve mortgage activities or companies and savings institutions - that engage in
transactions. transactions that involve lending to or financing the
activities of others, and entities that engage in
transactions that involve mortgage activities or
transactions, have specific guidance on accounting
for loans and loans held-for-sale. [948-310-35-1 -
3A]

Financial instruments at fair value through profit or loss

IFRS US

The fair value through profit or loss category of The following financial instruments are measured at
financial instruments includes: fair value through profit or loss:
• financial assets or financial liabilities • securities classified as trading,
held for trading - i.e. any financial which differ in certain respects from
asset or liability acquired or incurred IFRS (see below);

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 7. Financial instruments (IFRS compared to US GAAP)

to generate short-term profits, or

that is part of a portfolio of financial • all derivatives other than derivatives
instruments that are managed that qualify as cash flow or net
together for that purpose; investment hedging instruments,
which differs in certain respects
• all derivatives other than hedging from IFRS (see chapter 7.7); and
instruments (see chapter 7.7);
• financial assets or financial liabilities
• contingent consideration in a that are designated under the fair
business combination classified as a value option, which differs in certain
financial liability; and respects from IFRS (see below).
[320-10-35-1, 815-10-35-1, 825-10-
• financial assets or financial liabilities 15-4]
that are designated by the entity on
initial recognition as measured at
fair value through profit or loss.
[IFRS 3.58, IAS 39.9]

A financial asset or financial liability is classified as A security is classified as a trading security if it is:
held-for-trading if it is:
• a debt or marketable equity security
• acquired or incurred principally for bought and held principally for the
the purpose of selling or purpose of selling in the near term.
repurchasing it in the near term; Because US GAAP has more
guidance on the concept of 'near
• on initial recognition, part of a term', differences from IFRS may
portfolio of identified financial arise in practice; or
instruments that are managed
together and for which there is • a mortgage-backed security that is
evidence of a recent actual pattern held for sale in conjunction with
of short-term profit-taking; or mortgage banking activities, which is
unlike IFRS because IFRS has no
• a derivative, except for a derivative specific requirements for mortgage-
that is a designated and effective backed securities. [320-10-25-1,
hedging instrument (see chapter 948-310-40-1]
7.7). [IAS 39.9]
Unlike IFRS, derivatives, other than derivatives that
qualify as hedging instruments (see chapter 7.7),
are a separate category of financial asset or
financial liability, rather than part of the trading
classification.

In addition to financial assets and financial liabilities Unlike IFRS, entities have a free choice to designate
held for trading, financial assets and financial any of the following items on an instrument-by-
liabilities in the scope of the financial instruments instrument basis at fair value through profit or loss,
standard are classified in the fair value through on initial recognition or on a remeasurement event.
profit or loss category if an entity chooses, on initial Unlike IFRS, this is a free election with no other
recognition, to designate such instruments as at fair criteria needing to be met for most instruments.
value through profit or loss using the fair value Items eligible to be designated at fair value through
option. An entity may use this designation only: profit or loss include:

if doing so results in more relevant information • recognised financial assets or

because either: financial liabilities, including hybrid

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 7. Financial instruments (IFRS compared to US GAAP)

financial instruments if a derivative

- it eliminates or significantly embedded in a hybrid instrument
reduces a measurement or would otherwise require separation,
recognition inconsistency that except for investments in
would result from measuring subsidiaries or variable interest
assets or liabilities or entities that the entity is required to
recognising gains or losses on consolidate, certain employee
them on different bases (an benefit plans, leases, demand
'accounting mismatch'); or deposit liabilities and financial
- a group of financial assets or instruments classified by the issuer
financial liabilities (or both) is as equity;
managed and its performance is • firm commitments that would not
evaluated on a fair value basis in otherwise be recognised at inception
accordance with the entity's and that involve only financial
documented risk management or instruments - e.g. a forward
investment strategy, and purchase contract for a loan that is
information is provided to key not readily convertible to cash and
management personnel on this therefore is not a derivative;
basis; or
• written loan commitments;
• in respect of an entire hybrid
contract, if the contract contains one • rights and obligations under an
or more embedded derivatives, insurance contract issued by an
unless those embedded derivatives insurance company that is not a
either: financial instrument - because it
requires or permits the insurer to
- do not significantly modify the provide goods or services rather
cash flows that would otherwise than cash settlement - but whose
be required by the contract; or terms permit the insurer to settle by
- are ones for which it is clear paying a third party to provide those
with little or no analysis when goods or services;
first considering a similar hybrid • rights and obligations under a
instrument that separation is warranty that is not a financial
prohibited. [IAS 39.9, 11A] instrument but whose terms permit
the warrantor to settle by paying a
third party to provide the goods or
services under the arrangement;
and
• host financial instruments resulting
from the separation of an embedded
non-financial derivative instrument
from a non-financial hybrid
instrument. [825-10-15-4, 25-2]

Although some of the above items might be capable

of being designated at fair value through profit or
loss under IFRS, this would depend on whether the
specific criteria under IFRS are met.

This designation is not reversible and may be made Like IFRS, the designation is not reversible.
only on initial recognition. An entity can choose However, under US GAAP, the designation can be
which, if any, of its financial assets and liabilities are made at initial recognition or on the occurrence of a
to be designated into this category. [IAS 39.9, 11A, remeasurement event, which may result in

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 7. Financial instruments (IFRS compared to US GAAP)

AG4C] differences from IFRS. [825-10-10]

Held-to-maturity investments

IFRS US

Held-to-maturity investments are non-derivative The held-to-maturity classification under US GAAP is

financial assets with fixed or determinable payments like IFRS, except that US GAAP applies only to debt
and a fixed maturity that an entity has the positive securities. [320-10-25-1]
intention and ability to hold to maturity, other than:
• those that the entity on initial
recognition designates as at fair
value through profit or loss;
• those that the entity designates as
available-for-sale; and
• those that meet the definition of
loans and receivables. [IAS 39.9,
AG25]

The intent and ability to hold the securities until Like IFRS, the intent and ability to hold the securities
maturity are assessed at each reporting date. [IAS until maturity are assessed at each reporting date.
39.AG25] [320-10-25]

An entity is prohibited from classifying any financial The prohibition on classifying items as held-to-
assets as held-to-maturity if the entity has sold or maturity under US GAAP is like IFRS, except that US
reclassified more than an insignificant amount of GAAP does not provide a specific time horizon over
held-to-maturity assets in the current or previous which the prohibition lasts. For listed entities,
two financial years, other than: however, the SEC staff has indicated that the time
horizon should be at least two financial years. Sales
• when the asset was sufficiently close of debt securities meeting either of the following
to maturity or the asset's call date conditions are considered maturities and do not
that changes in market interest rates 'taint' the entity's ability to classify securities as held-
no longer had a significant effect on to-maturity:
the asset's fair value;
• when the security was sold
• sales that occur after the entity has sufficiently close to maturity or the
collected substantially all of the security's call date that changes in
investment's original principal market interest rates no longer had
through scheduled payments or a significant effect on the security's
prepayments; or fair value, like IFRS; or
• sales attributable to an isolated non- • sales that occur after collecting a
recurring event that is beyond the substantial portion of the principal,
entity's control and that it could not which differs from IFRS in certain
reasonably have anticipated. [IAS respects. [320-10-25-12 - 25-18]
39.9]

More specifically, sales in the following Additionally, sales in the following circumstances do
circumstances do not taint an entity's ability to not taint an entity's ability to classify securities as
classify instruments as held-to-maturity: held-to-maturity:

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 7. Financial instruments (IFRS compared to US GAAP)

• a significant deterioration in the • the sale is attributable to an isolated

issuer's creditworthiness; non-recurring event that is unusual
for the entity and that it could not
• a change in tax law that eliminates reasonably have anticipated, which
or significantly reduces the tax- differs in certain respects from
exempt status of interest on the IFRS;
investment;
• evidence of significant deterioration
• a major business combination or in the issuer's creditworthiness, like
major disposition that necessitates IFRS;
the sale or transfer of held-to-
maturity investments to maintain the • a change in tax law that eliminates
entity's existing interest rate risk or reduces the tax-exempt status of
position or credit risk policy; interest on the security, like IFRS;
• a change in statutory or regulatory • a major business combination or
requirements that significantly major disposition that necessitates
modifies what is a permissible the sale or transfer of held-to-
investment or the maximum holdings maturity securities to maintain the
of certain investments; entity's existing interest rate risk
position or credit risk policy, like
• a significant increase in the IFRS;
industry's regulatory capital
requirements that causes the entity • a change in statutory or regulatory
to downsize by selling held-to- requirements that significantly
maturity investments; and modifies what is a permissible
investment or the maximum holdings
• a significant increase in the risk of certain investments, like IFRS;
weights of held-to-maturity
investments used for regulatory risk- • a significant increase by the
based capital purposes. [IAS regulator in the industry's capital
39.AG22] requirements that causes the entity
to downsize by selling held-to-
maturity securities, like IFRS; and
• a significant increase in the risk
weights of debt securities used for
regulatory risk-based capital
purposes, like IFRS. [320-10-25-6,
25-9, 25-14]

Sales for other reasons 'taint' the entity's ability to Like IFRS, sales for other reasons 'taint' the entity's
classify any instruments as held-to-maturity. [IAS ability to classify any securities as held-to-maturity.
39.9] [320-10-25-9]

If a sale or reclassification of a held-to-maturity Like IFRS, if a sale or reclassification of a held-to-

investment results in tainting, then all existing held- maturity investment results in tainting, then all
to-maturity investments are reclassified as available- existing held-to-maturity investments are reclassified
for-sale for the current and next two complete as available-for-sale until the entity is able to re-
financial years. [IAS 39.9, AG25] establish a positive intent and ability to hold
securities to maturity. Unlike IFRS, US GAAP does
not specify how long the tainting lasts. For listed
entities, however, the SEC staff has indicated that
the period should be at least two financial years.
[320-10-35-7]

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 7. Financial instruments (IFRS compared to US GAAP)

Loans and receivables (Loans)

IFRS US

Loans and receivables are non-derivative financial US GAAP does not have a category of loans and
assets with fixed or determinable payments that are receivables, unlike IFRS. Loans are accounted for
not quoted in an active market, other than those: either at amortised cost or classified as held-for-
sale, in which case they are measured at the lower
• that the entity intends to sell of cost and fair value. Unlike IFRS, loans cannot be
immediately or in the near term, classified as trading or available-for-sale because
which are classified as held-for- they do not meet the definition of a security under
trading; US GAAP (see chapter 7.1). However, entities can
• that the entity on initial recognition make an irrevocable election on initial recognition to
designates as at fair value through measure loans at fair value through profit or loss
profit or loss (see above); (see below), like IFRS. [320-10-20]

• that the entity on initial recognition

designates as available-for-sale; or
• for which the holder may not
recover substantially all of its initial
investment, other than because of
credit deterioration, which are
classified as available-for-sale. [IAS
39.9]

This category includes purchased loans and Like IFRS, loans include purchased loans. [310]
receivables, and may include debt securities that are
not quoted in an active market. [IAS 39.BC28]

The classification of financial instruments as loans Loans that the entity intends to sell immediately or in
and receivables is not appropriate if an entity intends the near term are classified as loans held-for-sale,
to sell the instruments immediately or in the near unlike IFRS. Loans held-for-sale are measured at the
term. [IAS 39.9] lower of cost and fair value, unlike IFRS. [310-10-
35]

Available-for-sale financial assets (Available-for-sale securities)

IFRS US

Any financial asset that does not fall, or is not Unlike IFRS, the available-for-sale category under
classified into, any of the previous three categories US GAAP is available only for investments in debt
is classified as available-for-sale. [IAS 39.9] securities that are not classified as trading or held-
to-maturity (see above), and equity securities that
are marketable and that are not classified as
trading. These restrictions permit fewer financial
assets to be classified in the available-for-sale
category than IFRS. [320-10-25-1]

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 7. Financial instruments (IFRS compared to US GAAP)

A financial asset that the entity intends to hold to Like IFRS, a debt security that the entity intends to
maturity, or a loan or receivable, may also be hold to maturity may be designated as available-for-
designated as available-for-sale on initial sale on initial recognition. Unlike IFRS, a loan or
recognition. [IAS 39.9] receivable cannot be classified as available-for-sale
because it is not a security. Also unlike IFRS, non-
marketable equity securities may not be classified as
available-for-sale. [320-10-35-34, 35-34D]

Other liabilities

IFRS US

Other liabilities constitute the residual category Unlike IFRS, US GAAP does not prescribe a
similar to the available-for-sale category of financial classification category for financial liabilities, and
assets. All liabilities other than trading liabilities, differences from IFRS may arise.
liabilities designated as at fair value through profit or
loss, and derivatives that are hedging instruments
fall automatically into this category. [IAS 39.9]

Reclassifications of financial assets

IFRS US

The reclassification requirements related to financial The reclassification requirements related to financial
assets are as follows. assets are as follows.
• An entity may reclassify a financial • Loans may not be classified as held-
asset that meets the definition of for-trading, unlike IFRS. An entity
loans and receivables out of the may reclassify a loan out of the
held-for-trading category if it is no held-for-sale category if it has the
longer held for the purpose of being intention and ability to hold the loan
sold or repurchased in the near term for the foreseeable future or until
and the entity has the intention and maturity, which is similar to IFRS.
ability to hold the financial asset for
the foreseeable future or until • An entity may reclassify securities
maturity. out of the held-for-trading category
in rare circumstances, like IFRS.
• An entity may reclassify other non-
derivative financial assets out of the • An entity may reclassify securities
held-for-trading category if they are into the held-for-trading category in
no longer held for the purpose of rare circumstances, unlike IFRS.
being sold or repurchased in the • An entity may not designate or
near term in rare circumstances. dedesignate financial instrument as
• An entity may not reclassify any at fair value through profit or loss
financial asset into the held-for- after initial recognition unless there
trading category. is a remeasurement event, unlike
IFRS.

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 7. Financial instruments (IFRS compared to US GAAP)

• An entity may not reclassify any

financial asset into or from the • An entity may not classify a loan into
designated as fair value through the available-for-sale category,
profit or loss category. unlike IFRS.

• An entity may reclassify a financial • An entity may reclassify securities

asset that meets the definition of out of the available-for-sale category
loans and receivables out of the to held-to-maturity category as a
available-for-sale category if the result of a change in intention or
entity has the intention and ability to ability or because the tainting period
hold the financial asset for the has elapsed, like IFRS. However,
foreseeable future or until maturity. after securities are reclassified to
available-for-sale in response to a
• An entity may reclassify out of the taint, judgement is required in
available-for-sale category: determining when circumstances
have changed such that
- to the held-to-maturity category management can assert that it now
as a result of a change in has the intent and ability to hold
intention or ability or because debt securities to maturity, which
the two preceding financial years may result in differences from IFRS
after a tainting event have in practice. [320-10-35-7, 948-310-
elapsed; or 25-1]
- to financial instruments Unlike IFRS, non-marketable securities may not be
measured at cost in the rare classified as available-for-sale.
circumstances that a reliable
measure of fair value for certain
unquoted equity instruments is
no longer available. [IAS 39.50B,
50D-50E, 54, BC104D]

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 7. Financial instruments (IFRS compared to US GAAP)

7.5 Recognition and derecognition

IFRS US

(IAS 39, IFRIC 19) (ASC Subtopic 310-10 and 20; ASC Subtopic 320-
10; ASC Subtopic 325-20; ASC Subtopic 405-20;
ASC Topic 450; ASC Subtopic 460-10; ASC Subtopic
470-20, 50, and 60; ASC Subtopic 480-10; ASC
Subtopic 505-10, ASC Subtopic 810-10; ASC
Subtopic 815-10, 15, and 25; ASC Subtopic 820-10;
ASC Subtopic 825-10; ASC Subtopic 830-20; ASC
Topic 840; ASC Topic 860; ASC Subtopic 940-320;
ASC Subtopic 946-320 and 830; ASC Subtopic 948-
10; SAB Topic 5-M; SAB Topic 6-L)

Overview

IFRS US

• Financial assets and financial • Like IFRS, financial assets and

liabilities, including derivative financial liabilities, including
instruments, are recognised in the derivative instruments, are
statement of financial position at recognised in the statement of
trade date. However, 'regular-way' financial position at trade date.
purchases and sales of financial However, unlike IFRS, certain
assets are recognised either at trade industries are required to use trade
date or at settlement date. date accounting for 'regular-way'
transactions; otherwise, US GAAP is
silent and practice varies.

• A financial asset is derecognised • Unlike IFRS, the derecognition model

only when the contractual rights to for transfers of financial assets
the cash flows from the financial focuses on surrendering control over
asset expire or when the financial the transferred assets; the
asset is transferred and the transfer transferor has 'surrendered' control
meets certain conditions. over transferred assets only if
certain conditions are met.

• A financial asset is 'transferred' if an • Unlike IFRS, a financial asset is

entity transfers the contractual rights 'transferred' when it has been
to receive the cash flows from the conveyed by and to someone other
financial asset or enters into a than its issuer.
qualifying 'pass-through'
arrangement. If a financial asset is
transferred, then an entity evaluates
whether it has retained the risks and

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 7. Financial instruments (IFRS compared to US GAAP)

rewards of ownership of the

transferred financial asset.

• An entity derecognises a transferred • Unlike IFRS, 'risks and rewards' is

financial asset if it has: transferred not an explicit consideration when
substantially all of the risks and testing a transfer for derecognition.
rewards of ownership; or neither Rather, an entity derecognises a
retained substantially all of the risks transferred financial asset or a
and rewards of ownership nor participating interest therein if it
retained control of the financial surrenders legal, actual and
asset. effective control of the financial
asset or participating interest;
otherwise, it continues to recognise
the asset.

• An entity continues to recognise a • After a transfer of a financial asset,

financial asset to the extent of its or a participating interest therein, an
continuing involvement if it has entity continues to recognise the
neither retained nor transferred financial assets that it controls,
substantially all of the risks and which may be different from the
rewards of ownership and it has treatment required by IFRS.
retained control of the financial
asset.

• A financial liability is derecognised • Like IFRS, a financial liability is

when it is extinguished or when its derecognised when it is extinguished
terms are substantially modified. or when its terms are substantially
modified. However, unlike IFRS,
there is specific guidance on the
modification of terms in respect of
convertible debt and troubled debt
restructuring.

• The first chapters of a forthcoming • The FASB is also in the process of

standard on financial instruments, revising its financial instruments
which deals with the classification accounting. However, no revised
and measurement of financial assets standard has yet been issued.
and liabilities, derecognition and fair
value, are effective for annual
periods beginning on or after 1
January 2015. However, the IASB
have tentatively decided to postpone
the effective date at the date of this
publication being issued. For a
discussion of the forthcoming
requirements, see chapter 7A.

Initial recognition

IFRS US

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 7. Financial instruments (IFRS compared to US GAAP)

Financial instruments are recognised when an entity Like IFRS, initial recognition of a financial instrument
becomes party to the contractual terms of the occurs when an entity becomes party to the
instrument. [IAS 39.14] contractual terms of that instrument.

The purchase or sale of a non-derivative financial Unlike IFRS, certain industries are required to use
asset that will be delivered in a 'regular-way' trade date accounting for 'regular-way' transactions.
transaction may be recognised on trade date or Otherwise, US GAAP is silent and practice varies.
settlement date. The method adopted is applied Like IFRS, the method selected is applied
consistently to all purchases and all sales of financial consistently to purchases and sales of financial
assets in the same category. [IAS 39.38, AG53- assets in the same category. [940-320-25-1]
AG56]

Derecognition of financial assets

Derecognition criteria

IFRS US

An entity first consolidates all subsidiaries as An entity first consolidates all subsidiaries as
required under IFRS (see chapter 2.5) and then required under US GAAP (see chapter 2.5) and then
applies the derecognition principles to the resulting applies the derecognition principles to the resulting
group. [IAS 39.15] group, like IFRS. However, there are differences in
the consolidation requirements between IFRS and
US GAAP (see chapter 2.5). [860-10-40-4]

The derecognition analysis can be applied to: The derecognition analysis can be applied to:
• a financial asset or a group of • a financial asset or a group of
similar financial assets; or similar financial assets, like IFRS; or
• part of a financial asset or a group • participating interests, unlike IFRS.
of financial assets. [IAS 39.16] [405-20-40-1, 860-20-40-1A]

The derecognition analysis is applied to a part of a Unlike IFRS, transferring a part of a financial asset
financial asset or a group of similar financial assets that does not meet the definition of a participating
only if that part comprises either: interest does not qualify for derecognition. A
'participating interest' is a portion of a financial asset
• specifically identified cash flows that (1) conveys proportionate ownership rights with
arising from a financial asset (or a equal priority to each participating interest holder;
group of similar financial assets); (2) involves no recourse (other than standard
• a fully proportionate share of the representations and warranties) to, or subordination
cash flows, arising from a financial by, any participating interest holder; and (3) does
asset (or a group of similar financial not entitle any participating interest holder to receive
assets); or cash before any other participating interest holder.
[860-10-40-6A]
• a fully proportionate share of
specifically identified cash flows,
arising from a financial asset (or a
group of similar financial assets).
[IAS 39.16(a)]

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 7. Financial instruments (IFRS compared to US GAAP)

In all other cases, the derecognition assessment is In all cases that do not constitute a participating
applied to a financial asset in its entirety, or to the interest, the derecognition assessment is applied to
group of similar financial assets in its entirety. [IAS a financial asset in its entirety, or to the group of
39.16(b)] similar financial assets in its entirety, like IFRS.
[860-10-20]

An entity derecognises a financial asset when the Unlike IFRS, a 'transfer' of financial assets, or a
contractual rights to the cash flows from that asset participating interest, in which the transferor
expire or when the entity transfers a financial asset surrenders control over the assets ('financial
and the transfer qualifies for derecognition. [IAS components approach') is accounted for as a sale
39.17] (i.e. derecognition). [860-20-40-1A - 40-1B]

Evaluating whether there is a transfer

IFRS US

An entity is considered to have transferred a Unlike IFRS, a 'transfer' is the conveyance of a non-
financial asset, or a part thereof, if the entity: cash financial asset by and to someone other than
the issuer of that financial asset. Therefore, a
• transfers its contractual rights to transfer includes selling a receivable, putting it into a
receive the cash flows from the securitisation trust or posting it as collateral, but
asset; or excludes the origination of that receivable, the
• retains the contractual rights to settlement of that receivable or the restructuring of
receive the cash flows, but assumes that receivable into a security in a troubled debt
a contractual obligation to pay the restructuring. [860-10-20]
cash flows to one or more recipients
in an arrangement that meets
certain criteria. [IAS 39.18]

Pass-through arrangements

IFRS US

If an entity retains the contractual right to the cash Unlike IFRS, US GAAP does not contain a pass-
flows of a financial asset, but also assumes a through derecognition test. Items that would qualify
contractual obligation to pay the cash flows to the for derecognition under IFRS because they meet the
transferee (sometimes called a 'pass-through pass-through test and the other derecognition
arrangement'), then the transaction is considered a conditions would not qualify for derecognition under
transfer if and only if: US GAAP unless they met the criteria described
below for derecognising a transferred financial
• there is no obligation to pay asset. Conversely, items that would not qualify for
amounts to the transferee unless the derecognition under IFRS because they fail to meet
entity collects equivalent amounts either the pass-through criteria or the other
from the original asset; derecognition conditions may qualify for
• the entity is prohibited from selling derecognition under US GAAP if they meet the
or pledging the original asset under criteria described below for derecognising a
the terms of the pass-through transferred financial asset.
arrangement; and

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 7. Financial instruments (IFRS compared to US GAAP)

• the entity is obliged to remit all cash

flows that it collects without material
delay. [IAS 39.19]

Risks and rewards evaluation

IFRS US

For all transactions that meet the transfer Unlike IFRS, 'risks and rewards' is not an explicit
requirements, the entity next evaluates whether it consideration when testing a transfer for
has transferred or retained the risks and rewards of derecognition. Unlike IFRS, under US GAAP
ownership of the financial asset: transferred financial assets or participating interests
are derecognised when the transferor surrenders
• If the entity retains substantially all control over those assets. The transferor has
of the risks and rewards of 'surrendered' control over transferred assets only if
ownership of the financial asset, all of the following conditions are met.
then it continues to recognise the
financial asset. • Legal control: The transferred asset
is isolated from the transferor - i.e.
• If the entity transfers substantially all put legally beyond the reach of the
of the risks and rewards of transferor, including its consolidated
ownership, then it derecognises the affiliates and its creditors, even in
financial asset. the event of the transferor's
• If the entity neither transfers nor bankruptcy or receivership.
retains substantially all of the risks • Actual control: The transferee or, if
and rewards of ownership, then it the transferee is an entity whose
determines whether it has retained sole purpose is to engage in
control of the financial asset (see securitisation or asset-backed
below). [IAS 39.20] financing activities and that entity is
constrained from pledging or
exchanging the assets that it
receives, each third party holder of
its beneficial interests, has the right
to pledge or exchange the assets (or
beneficial interests) that it received,
and no condition both constrains the
transferee (or each third party
holder of its beneficial interests)
from taking advantage of its right to
pledge or exchange and provides
more than a trivial benefit to the
transferor.

Effective control: Neither the transferor nor its

consolidated affiliates included in the financial
statements being presented or its agents maintains
effective control over the transferred financial assets
or third party beneficial interests related to those
transferred assets. Examples include, but are not
limited to: (1) an agreement that both entitles and
obligates the transferor to repurchase or redeem the
assets before maturity; (2) an agreement that

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 7. Financial instruments (IFRS compared to US GAAP)

provides the transferor with both the unilateral

ability to cause the holder to return specific financial
assets and a more-than-trivial benefit attributable to
that ability, other than through a clean-up call; or (3)
an agreement that permits the transferee to require
the transferor to repurchase the transferred financial
assets at a price that is so favourable to the
transferee that it is probable that the transferee will
require the transferor to repurchase them. [860-10-
40-4 - 40-5]

The transfer is accounted for as a sale to the extent

that consideration other than beneficial interests in
the transferred assets is received in exchange. [860-
10]

Control evaluation

IFRS US

If an entity neither transfers nor retains substantially Unlike IFRS, under US GAAP control is always the
all of the risks and rewards of ownership of a focus of derecognition tests, rather than being
financial asset, then it evaluates whether it has considered only if an entity neither transfers nor
retained control of the financial asset. If the entity retains substantially all of the risks and rewards of
does not retain control, then it derecognises the ownership. Derecognition is based on whether legal,
financial asset. [IAS 39.20(c)] actual and effective control as described above has
been surrendered. [860-10-40-5]

An entity is considered to have lost control if the Unlike IFRS, derecognition is based on whether
transferee has the practical ability to unilaterally sell legal, actual and effective control as described above
the transferred financial asset in its entirety to an have been surrendered. [860-10-40-5]
unrelated party without needing to impose additional
restrictions on the sale. [IAS 39.23]

Continuing involvement

IFRS US

If an entity retains control of a financial asset for As described above, unlike IFRS, continuing
which some but not substantially all of the risks and involvement is not an explicit consideration when
rewards have been transferred, then the entity testing a transfer for derecognition, but rather
continues to recognise the financial asset to the derecognition is based on whether legal, actual and
extent of its continuing involvement in the financial effective control have been surrendered. However,
asset. [IAS 39.20(c)(ii)] after a transfer of financial assets or participating
interests, an entity continues to recognise the
financial and servicing assets that it controls and
derecognises the financial assets or participating
interest for which control has been surrendered.

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 7. Financial instruments (IFRS compared to US GAAP)

[860-20-40-1A]

Accounting for a sale

Transfers that qualify for derecognition

IFRS US

If only part of a financial asset qualifies to be Like IFRS, if a transfer of a participating interest
derecognised, then the carrying amount of the entire qualifies as a sale, then the carrying amount of the
financial asset before the transfer is allocated transferred asset before the transfer is allocated
between the sold and retained portions based on between the sold and retained participating interests
their relative fair values on the date of transfer. [IAS based on their relative fair values on the date of
39.27] transfer. [860-20-40-1A(a)]

Sometimes new financial assets or financial liabilities In general, if new financial assets or financial
are created in the transfer - e.g. a credit guarantee. liabilities are created in the transfer, then they are
New financial assets or financial liabilities created as recognised separately and measured at fair value,
a result of the transfer are recognised separately like IFRS. Like IFRS, servicing assets and servicing
and measured at fair value. Servicing assets and liabilities are not considered financial instruments.
servicing liabilities are not considered financial [860-20-40-1A(c)]
instruments. [IAS 39.24-25]

If an entity transfers a financial asset that qualifies If an entity transfers a financial asset that qualifies
for derecognition in its entirety and retains the right for derecognition in its entirety and retains the right
to service the financial asset for a fee, then it to service the financial asset for a fee, then the
recognises either: entity should recognise either:
• a servicing liability, at fair value, if • a servicing liability, at fair value, if
the fee does not adequately the fee does not adequately
compensate the entity for compensate the entity for
performing the servicing; or performing the servicing, like IFRS;
or
• a servicing asset, calculated as an
allocation of the carrying amount of • a servicing asset, if the fee more
the entire financial asset before the than adequately compensates the
transfer between the sold and entity for performing the servicing,
retained portions based on their like IFRS; however, the servicing
relative fair values on the date of asset is recognised at fair value,
transfer, if the fee more than unlike IFRS. [860-50-25-1, 860-50-
adequately compensates the entity 30-1, 30-2]
for performing the servicing. [IAS
39.24]

In a transfer of a financial asset or a part thereof Like IFRS, in a transfer of an entire financial asset or
that qualifies for derecognition, a gain or loss is a participating interest, a gain or loss is recognised
recognised based on the difference between (1) the based on the difference between (1) the carrying
carrying amount of the financial asset or the carrying amount of the financial asset or the carrying amount
amount allocated to the part derecognised; and (2) allocated to the part derecognised; and (2) the sum
the sum of the proceeds received for the asset or of the proceeds received for the asset or the
the part derecognised, including the fair value of any participating interest derecognised, including the fair

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 7. Financial instruments (IFRS compared to US GAAP)

new financial assets acquired or financial liabilities value of any new financial assets acquired or
assumed in the transfer, and the cumulative amount financial liabilities assumed in the transfer, and the
previously recognised in OCI in respect of the cumulative amount previously recognised in OCI in
transferred financial asset or part thereof that is respect of the transferred financial asset or part
derecognised. [IAS 39.26-27] thereof that is derecognised. [860-20-55-43 - 55-59]

There is no specific guidance on the subsequent Unlike IFRS, an entity has an accounting policy
measurement of servicing assets and servicing election to measure servicing assets and liabilities
liabilities and they are subsequently measured in subsequently either at fair value through profit or
accordance with other applicable IFRSs. loss or by amortising the servicing asset or liability in
proportion to and over the period of estimated net
servicing income or loss. [860-50-35-1]

Transfers that do not qualify for derecognition

IFRS US

If a transfer does not qualify for derecognition, then Like IFRS, if a transfer does not qualify for
the financial asset or the retained portion of the derecognition, then the asset or the participating
financial asset remains in the statement of financial interest retained remains in the statement of
position and a corresponding financial liability is financial position and a corresponding financial
recognised for any consideration received. [IAS liability is recognised for any consideration received.
39.29, AG47] [860-20-40-1A - 40-1B]

Securitisations

IFRS US

In a securitisation, the transferring entity securitises In a securitisation, the transferring entity transfers
financial assets in return for cash proceeds. If financial assets to a structure in return for cash
financial instruments are securitised using a proceeds. Like IFRS, an entity first evaluates all
structured entity (see chapter 2.5) that is securitisation structures for consolidation under US
consolidated, then the transaction to evaluate for GAAP guidance, which differs from IFRS in certain
derecognition at the group level is the transfer of respects (see chapter 2.5). Like IFRS, if the
financial assets by the group, including the structure is consolidated, then the transaction to
structured entity, to the investors in the securities evaluate for derecognition at the group level is the
issued by the structured entity. If the structured transfer of financial assets by the group, including
entity is not required to be consolidated, then the the structure, to the structure's beneficial interest
transaction to evaluate for derecognition at the holders. Like IFRS, if a structure is not required to
group level is the transfer of financial assets by the be consolidated, then the transaction to evaluate for
group, excluding the structured entity, to the derecognition at the group level is the transfer of the
structured entity. [IAS 39.15] financial assets by the group, excluding the
structure, to the structure. [860-10-40-4]

Repurchase agreements and securities lending

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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

If a sale of a financial asset is subject to a Like IFRS, if a sale of a financial asset is subject to a
repurchase agreement at a fixed price, or at the repurchase agreement at a fixed price, or at the
initial selling price plus interest, or if the asset is lent initial selling price plus interest, or if the asset is lent
to a third party who agrees to return it, then the to a third party who agrees to return it, then the
seller does not derecognise the asset, although it seller does not generally derecognise the asset,
may reclassify it in the statement of financial although it might reclassify it in the statement of
position. [IAS 39.37(a), AG51(a)] financial position. [860-10-40-12, 40-24]

Derecognition of financial liabilities

IFRS US

A financial liability is derecognised when it is Like IFRS, a financial liability is derecognised when it
extinguished - i.e. it is discharged or cancelled or is extinguished. This may happen when:
expires. This may happen when:
• the debtor pays the creditor and is
• payment is made to the lender; relieved of its obligation for the
liability;
• the borrower is legally released
from primary responsibility for the • the debtor is legally released from
financial liability; or being the primary obligor under the
liability either judicially or by the
• there is an exchange of debt creditor; or
instruments with substantially
different terms or a substantial • there is an exchange or modification
modification of the terms of an that results in debt instruments with
existing financial liability. [IAS 39.39- substantially different terms. [405-
40, AG57, AG59] 20-40-1, 470-50-40-6]

If a financial liability is restructured or refinanced Like IFRS, if a liability is restructured or refinanced

and the terms have been substantially modified, then and the terms have been substantially modified, then
the transaction is accounted for as an the transaction is accounted for as an
extinguishment of the old debt, with a gain or loss extinguishment of the old debt, with a gain or loss
recognised in profit or loss. Any costs or fees recognised in profit or loss. The gain or loss includes
incurred are recognised immediately in profit or loss unamortised debt issue costs associated with the
on extinguishment. The gain or loss includes extinguished debt as well as fees paid to or received
unamortised debt issue costs associated with the from the creditor, like IFRS. Like IFRS, the new debt
extinguished debt as well as fees paid to or received is recognised at fair value but, unlike IFRS, fees paid
from the creditor and third parties. The new debt is to third parties are capitalised as debt issue costs.
recognised at fair value. [IAS 39.40-41, AG62] [470-50-40-6, 40-13, 40-17]

If a liability is restructured or refinanced and the Like IFRS, if a liability is restructured or refinanced
terms have not been substantially modified - i.e. not and the terms have not been substantially modified,
accounted for as an extinguishment - then any fees then fees paid to or received from the creditor are
and costs incurred, and existing unamortised debt capitalised and, along with existing unamortised debt
issue costs, are recognised as an adjustment to the issue costs, are amortised over the remaining term
carrying amount of the liability and amortised over of the modified instrument by recomputing the
the remaining term of the modified instruments by effective interest rate. Fees paid to third parties are
recomputing the effective interest rate.[IAS expensed as they are incurred, unlike IFRS. [470-50-
39.AG62] 40-17 - 40-18]

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 7. Financial instruments (IFRS compared to US GAAP)

Terms are considered to have been 'substantially Like IFRS, terms are considered to have been
modified' if the net present value of the cash flows 'substantially modified' if the net present value of the
under the new terms, discounted using the original cash flows under the new terms, discounted using
effective interest rate - i.e. of the original liability - the original effective interest rate - i.e. of the
differs by at least 10 percent from the present value original liability - differs by at least 10 percent from
of the remaining payments under the original terms. the present value of the remaining payments under
[IAS 39.AG62] the original terms. [470-50-40-10]

If the 10 percent limit is not breached - i.e. the Unlike IFRS, the 10 percent quantitative test is
difference in the present values of the cash flows is applied as a bright line, except that when there is a
less than 10 percent - then in our view the entity change in the debt's currency we believe an
should perform a qualitative assessment to accounting policy choice can be made to either apply
determine whether the terms of the two instruments the 10 percent test or conclude that the terms of the
are substantially different. debt have been substantially modified. [470-50-40-
12]

There are no special requirements for the Unlike IFRS, for convertible debt there are specific
modification of convertible debt. additional tests that require consideration of the
addition or removal of a conversion option or the
change in the value of the conversion option, which
can also result in a conclusion that the terms have
been substantially modified. [470-50-40-10 - 40-12]

There are no special requirements for troubled debt Unlike IFRS, there are specific requirements for
restructurings. troubled debt restructurings. Like IFRS, a debtor
recognises a gain on the restructuring of troubled
debt if it has transferred assets or equity interests in
full settlement of the obligation. Unlike IFRS, if the
debt has been restructured by modification of its
terms, or by transferring assets or equity interests in
partial settlement and modifying the remaining
terms, then no gain is recognised unless the total
undiscounted modified cash flows are less than the
carrying amount of the debt. The effective interest
rate is recalculated as the discount rate that equates
the present value of future contractual cash flows
with the carrying amount of the debt. [470-60-35-1 -
35-12]

The debtor in a debt-for-equity swap transaction Like IFRS, the debtor in a debt-for-equity swap
that arises as a result of a renegotiation of the terms transaction that arises as a result of a renegotiation
of a financial liability measures equity instruments of the terms of a financial liability measures equity
issued to a creditor to extinguish all or part of a instruments issued to a creditor to extinguish all or
financial liability at the fair value of those equity part of a financial liability at the fair value of those
instruments, unless that fair value cannot be reliably equity instruments. Unlike IFRS, there is no 'reliably
measured, in which case the equity instruments are measurable' exception for measuring the equity
measured to reflect the fair value of the financial interests at fair value. The difference between the
liability extinguished. The difference between the carrying amount of the financial liability (or part of
carrying amount of the financial liability - or part of the financial liability) extinguished and the initial
the financial liability, if appropriate - extinguished measurement amount of the equity instruments
and the initial measurement amount of the equity issued is recognised in profit or loss, like IFRS. [470-
instruments issued is recognised in profit or loss. 50-40]

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 7. Financial instruments (IFRS compared to US GAAP)

[IFRIC 19.5-9]

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 7. Financial instruments (IFRS compared to US GAAP)

7.6 Measurement and gains and losses

IFRS US

(IFRS 13, IAS 18, IAS 21, IAS 32, IAS 39) (ASC Subtopic 310-10 and 20; ASC Subtopic 320-
10; ASC Subtopic 325-20; ASC Subtopic 405-20;
ASC Topic 450; ASC Subtopic 460-10; ASC Subtopic
470-20, 50, and 60; ASC Subtopic 480-10; ASC
Subtopic 505-10, ASC Subtopic 810-10; ASC
Subtopic 815-10, 15, and 25; ASC Subtopic 820-10;
ASC Subtopic 825-10; ASC Subtopic 830-20; ASC
Topic 840; ASC Topic 860; ASC Subtopic 940-320;
ASC Subtopic 946-320 and 830; ASC Subtopic 948-
10; SAB Topic 5-M; SAB Topic 6-L)

Overview

IFRS US

• All financial assets and financial • Like IFRS, derivatives, securities

liabilities are initially measured at classified as trading and instruments
fair value plus directly attributable for which the fair value through
transaction costs, except for profit or loss option has been
financial instruments classified as at elected are initially measured at fair
fair value through profit or loss, value. Unlike IFRS, available-for-sale
which are initially measured at fair securities are initially measured at
value. fair value with no inclusion of
transaction costs. Unlike IFRS, other
financial instruments are initially
measured at cost.

• Financial assets are subsequently • Financial assets held for trading,

measured at fair value, except for financial assets for which the fair
loans and receivables and held-to- value option is elected and available-
maturity investments (which are for-sale securities are subsequently
measured at amortised cost) and measured at fair value, like IFRS.
investments in unlisted equity Unlike IFRS, loans held-for-sale are
instruments (which are measured at measured at the lower of cost and
cost in the rare event that fair value fair value. Investments in non-
cannot be measured reliably). marketable equity instruments are
always recorded at cost, unlike
IFRS.

• Changes in the fair value of • Like IFRS, changes in the fair value
available-for-sale financial assets of available-for-sale securities are
are recognised in OCI, except for recognised in OCI, except for

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 7. Financial instruments (IFRS compared to US GAAP)

foreign exchange gains and losses impairment losses, which are

on available-for-sale monetary items recognised in profit or loss if, unlike
and impairment losses, which are IFRS, they are deemed to be 'other
recognised in profit or loss. On than temporary'. However, unlike
derecognition, any gains or losses IFRS, the amount recognised in OCI
accumulated in OCI are reclassified includes foreign exchange gains and
to profit or loss. losses on all available-for-sale
securities. Like IFRS, on
derecognition any gains or losses
accumulated in OCI are reclassified
to profit or loss.

• Financial liabilities, other than those • Like IFRS, financial liabilities are
held for trading or designated at fair generally measured at either fair
value through profit or loss, are value or amortised cost subsequent
generally measured at amortised to initial recognition.
cost subsequent to initial
recognition.

• Changes in the fair value of financial • Like IFRS, changes in the fair value
assets and financial liabilities at fair of financial assets and financial
value through profit or loss are liabilities at fair value through profit
recognised in profit or loss. or loss are recognised in profit or
loss.

• All derivatives (including separated • Like IFRS, all derivatives (including

embedded derivatives) are separated embedded derivatives)
measured at fair value. are measured at fair value.

• Interest income and interest • Like IFRS, interest income and

expense are calculated under the interest expense are calculated
effective interest method, based on under the effective interest method.
estimated cash flows that consider However, the effective interest
all contractual terms of the financial method is generally based on the
instrument at the date on which the contractual cash flows of the
instrument is initially recognised or financial instrument, unlike IFRS,
at the date of any modification. except for instruments that are
credit-impaired when they are
acquired, for which, like IFRS,
interest income is based on
estimated cash flows.

• An entity assesses whether there is • Unlike IFRS, there is not a single

objective evidence of impairment of overarching requirement for
financial assets not measured at fair objective evidence of impairment in
value through profit or loss. When assessing the impairment of
there is objective evidence of financial assets. Instead, different
impairment, any impairment loss is impairment models are applied to
recognised in profit or loss. different categories of financial
instruments. Unlike IFRS, an
impairment loss on a security is
recognised only if it is other than
temporary, even if there is objective

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 7. Financial instruments (IFRS compared to US GAAP)

evidence that the security may be

impaired. If the impairment is other
than temporary, then any
impairment loss is recognised in
profit or loss, except in certain
situations involving debt securities,
in which case the impairment loss is
split between profit or loss and OCI.

• The first chapters of a forthcoming • The FASB is also in the process of

standard on financial instruments, revising its financial instruments
which deals with the classification accounting. However, no revised
and measurement of financial assets standard has yet been issued.
and financial liabilities, derecognition
and fair value, are effective for
annual periods beginning on or after
1 January 2015. However, the IASB
have tentatively decided to postpone
the effective date at the date of this
publication being issued. For a
discussion of the forthcoming
requirements, see chapter 7A.

Measurement at initial recognition

IFRS US

All financial instruments are initially measured at fair Derivatives, securities classified as trading and
value plus directly attributable transaction costs, instruments for which the fair value through profit or
except for instruments classified as at fair value loss option has been elected are initially measured
through profit or loss. [IAS 39.43, AG64] at fair value, like IFRS. Unlike IFRS, available for
sale securities are initially measured at fair value
with no inclusion of transaction costs. Unlike IFRS,
most other financial instruments are initially
measured at cost, which includes transaction costs.
[815-10-30-1, 320-10-25, 325-20-30]

Generally, gains and losses are not recognised on Like IFRS, gains and losses are not generally
the initial recognition of a financial instrument. The recognised on the initial recognition of a financial
exception is when a gain or loss on initial recognition instrument. However, unlike IFRS, an entity could
is supported by comparison with other observable demonstrate that fair value differs from the
current market transactions in the same instrument, transaction price on initial recognition because either
or is based on a valuation technique whose variables the entity is able to operate at a different point in the
include only data from observable markets. [IAS bid-ask spread for the instrument, the entity has
39.AG76-AG76A] access to and frequently transacts in a different
reference market for the instrument or, like IFRS,
there are observable market prices or valuation
techniques that use only observable market inputs.
[820-10-30]

Transaction costs are included in the initial Unlike IFRS, directly related transaction costs for

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 7. Financial instruments (IFRS compared to US GAAP)

measurement of financial instruments, except for financial instruments classified as available-for-sale

those classified as at fair value through profit or are not included in the determination of the initial
loss. 'Transaction costs' include only those costs that measurement. Investment companies include
are directly attributable to the acquisition of a directly related transaction costs for financial
financial asset or the issue of a financial liability. instruments at fair value through profit or loss in the
They are incremental costs that would not have determination of cost on initial recognition, unlike
been incurred if the instrument had not been IFRS. Unlike IFRS, such transaction costs for
acquired or issued. In practice, few internal costs available-for-sale securities are not included in the
are likely to meet this requirement. The requirement determination of cost on initial recognition. Also
is applied on an instrument-by-instrument basis. unlike IFRS, certain internal costs of originating
Transaction costs do not include the internal costs loans that are related directly to specified activities
associated with developing a new investment performed by the lender are included in capitalised
product. [IAS 39.9, 43, AG13] initial direct costs. However, for financial liabilities
the transaction costs are deferred as an asset,
unlike IFRS. [310-20-25-2, 470-20-25-26]

Like all other financial instruments, loans and Unlike IFRS, there is no general requirement for
receivables are measured on initial recognition at loans to be measured at initial recognition at fair
fair value. This means that if a loan has no interest value and loans are generally initially measured
or a low interest rate as determined with reference based on the cash proceeds. Like IFRS, the initial
to the interest rates currently charged by the entity measurement of a low-interest or interest-free loan
or by others for similar debt instruments, then the is based on the present value of the expected future
amount of disbursement is adjusted so that the loan cash flows, discounted using a market interest rate.
is initially recognised at fair value. For example, the However, unlike IFRS, the initial measurement
fair value of a long-term loan that carries no interest guidance for a low-interest or interest-free loan
can be estimated as the present value of all future does not apply to the customary lending activities of
cash receipts, discounted using the prevailing market financial institutions. [310-10-30-2, 30-6]
rates. [IAS 39.AG64]

For short-term receivables and payables with no Unlike IFRS, US GAAP does not require the
stated interest rate, no interest is imputed when the discounting of trade receivables and payables
impact of discounting would be immaterial. maturing in less than one year, regardless of
materiality. [835-30-15-3(a)]

Eligible transaction costs

IFRS US

Transaction costs on financial instruments at fair Like IFRS, transaction costs on financial instruments
value through profit or loss are charged immediately at fair value through profit or loss are charged
to profit or loss. [IAS [Link].1.1] immediately to profit or loss.

For other financial instruments, eligible transaction For available-for-sale assets, transaction costs are
costs are included in the initial measurement of the recognised in profit or loss, unlike IFRS. Like IFRS,
instrument. Such transaction costs are therefore for other financial instruments - i.e. those not
included in the measurement of interest income or measured at fair value through profit or loss and not
expense. [IAS 39.9] classified as available-for-sale - transaction costs
are included in the initial measurement of the
instrument. However, unlike IFRS, debt issue costs
are treated as a separate asset that is amortised to
interest expense, which results in different

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 7. Financial instruments (IFRS compared to US GAAP)

statement of financial position classification from the

'net' treatment of issued debt instruments under
IFRS. [835-30-35-1 - 35-5, 45-1 - 45-4]

The inclusion in the initial measurement of a Unlike IFRS, US GAAP contains specific guidance
financial instrument of internal transaction costs is requiring certain internal costs directly attributable to
not specifically addressed by IFRS. In our the origination of a loan to be capitalised as part of
experience, few internal costs are likely to be eligible the cost of the loan. Such costs are costs directly
transaction costs. [IAS 39.AG13] related to specific activities performed by the lender
for that loan, such as evaluating the prospective
borrower's financial condition; evaluating and
recording guarantees, collateral and other security
arrangements; negotiating loan terms; preparing
and processing loan documents; and closing the
transaction. Amounts capitalised include only that
portion of the employer's total compensation related
to time spent performing these activities for that
loan. Other costs - e.g. advertising, servicing of
existing loans and supervision and administration -
are not capitalised. [310-20-20, 310-20-25-1 - 25-7]

Sometimes fees, points paid or received, transaction Sometimes fees, points paid or received, transaction
costs or discounts and premiums relate to variables costs or discounts and premiums relate to variables
that will be repriced to market rates before the that will be repriced to market rates before the
expected maturity of the investment. Such items are expected maturity of the investment. Like IFRS, such
amortised over the period to the repricing date as items are amortised over the period to the repricing
part of the effective interest rate calculation (see date as part of the effective interest rate calculation
below). However, the entity assesses whether there (see below). However, the entity assesses whether
is an embedded derivative that requires separation there is an embedded derivative that requires
(see chapter 7.2). [IAS 39.AG6] separation (see chapter 7.2), like IFRS. [815-15]

Any transaction costs that do not qualify for inclusion Like IFRS, any transaction costs that do not qualify
in the initial measurement of an instrument are for inclusion in the initial measurement of an
expensed as they are incurred. [IAS 39.43] instrument are expensed as they are incurred. [310-
20-20, 310-20-25-1 - 25-7]

Subsequent measurement

IFRS US

The following measurement requirements apply to The following measurement requirements apply to
all financial assets and financial liabilities. However, all financial assets and financial liabilities. However,
financial assets and financial liabilities that are like IFRS, financial assets and financial liabilities that
designated as hedged items may require further are designated as hedged items may require further
adjustment in accordance with the hedge accounting adjustment in accordance with the hedge accounting
requirements (see chapter 7.7). [IAS 39.46, 47] requirements (see chapter 7.7). As discussed in
chapter 7.4, there are differences between IFRS and
US GAAP regarding the items that may be included
in the categories that follow.

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 7. Financial instruments (IFRS compared to US GAAP)

Fair value through profit or loss

IFRS US

Subsequent to initial recognition, financial Like IFRS, subsequent to initial recognition, financial
instruments at fair value through profit or loss are instruments at fair value through profit or loss are
measured at fair value and all changes in fair value, measured at fair value and all changes in fair value,
both realised and unrealised, are recognised both realised and unrealised, are recognised
immediately in profit or loss. [IAS 39.46, 47(a)] immediately in profit or loss. [825-10-35-4]

Held-to-maturity investments(Held-to-maturity securities)

IFRS US

Subsequent to initial recognition, held-to-maturity Like IFRS, subsequent to initial recognition, held-to-
investments are measured at amortised cost using maturity securities are measured at amortised cost
the effective interest method (see below). [IAS using the effective interest method. Although there
39.46(b)] are differences in the calculation of amortised cost
between US GAAP and IFRS, in general we would
not expect those differences to be significant. [320-
10-35-1]

Loans and receivables(Loans)

IFRS US

Subsequent to initial recognition, loans and Like IFRS, subsequent to initial recognition, loans not
receivables are measured at amortised cost using held for sale and receivables are measured at
the effective interest method (see below). [IAS amortised cost using the effective interest method
39.46(a)] (see below). However, there are differences from
IFRS in the determination of amortised cost - e.g. in
respect of transaction costs. Additionally, unlike
IFRS, loans held-for-sale are measured at the lower
of cost and fair value. [310-10-35-47, 948-310-35-1]

Available-for-sale financial assets(Available-for-sale securities)

IFRS US

Subsequent to initial recognition, available-for-sale Like IFRS, subsequent to initial recognition,

financial assets are measured at fair value. Gains available-for-sale securities are measured at fair
and losses on remeasurement, except for foreign value. Also like IFRS, gains and losses on fair value
exchange gains and losses on monetary items, are remeasurement are recorded in OCI. However,
recognised in OCI. [IAS 39.46, 55(b), 67] unlike IFRS, foreign currency remeasurement gains

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 7. Financial instruments (IFRS compared to US GAAP)

and losses are recorded in OCI. [320-10-35-1, 35-

34A - 35-34E, 35-36]

For available-for-sale debt instruments, interest is Like IFRS, for available-for-sale debt securities,
calculated using the effective interest method and is interest is calculated using the effective interest
recognised in profit or loss (see below). [IAS 39.55 method and is recognised in profit or loss. [320-10-
(b)] 35-38-35-43]

Amounts recognised in OCI are reclassified to profit Like IFRS, amounts recognised in accumulated OCI
or loss when the related asset is derecognised or are reclassified to profit or loss when the related
impaired. For a partial disposal, a share of the fair asset is derecognised. However, unlike IFRS, an
value gains and losses recognised previously in OCI impairment does not always result in a
is reclassified from equity to profit or loss. [IAS reclassification of the related amounts in
39.26-27, 55(b), 67] accumulated OCI. [320-10-35-34, 35-34D]

Other liabilities

IFRS US

Subsequent to initial recognition, other financial US GAAP does not have an 'other liabilities' category.
liabilities are measured at amortised cost using the However, like IFRS, subsequent to initial recognition,
effective interest method (see below). However, liabilities that are not measured at fair value through
there are specific measurement requirements for profit or loss are measured at amortised cost using
the following financial liabilities: the effective interest method (see below). However,
there are specific measurement requirements for
• financial liabilities that arise when a the following financial liabilities:
transfer of a financial asset does not
qualify for derecognition; • mandatorily redeemable
instruments, unlike IFRS;
• financial guarantee contracts;
• financial guarantee contracts, like
• commitments to provide loans at IFRS;
below market rate; and
• obligations to repurchase an issuer's
• a liability to repurchase own equity own equity shares, although the
instruments. [IAS 32.23, 39.47] requirements differ from IFRS (see
below); and
• certain obligations to issue a
variable number of shares, unlike
IFRS. [480-10-35-1, 35-3, 35-5,
825-10-15-4]

Under US GAAP, there is no specific guidance for

commitments to provide loans at below-market
rates.
Additionally, there are differences from IFRS in the
determination of cost for the purposes of applying
amortised cost - e.g. in respect of transaction costs.

A liability to repurchase own equity instruments is Unlike IFRS, mandatorily redeemable instruments

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 7. Financial instruments (IFRS compared to US GAAP)

measured at the present value of the redemption and obligations to repurchase a fixed number of an
amount. [IAS 32.23] issuer's own equity shares are subsequently
measured at settlement value or at net present
value, depending on the situation. Also unlike IFRS,
certain obligations to issue or repurchase a variable
number of shares are measured subsequently at fair
value. [480-10-35-1 - 35-5]

Fair value

IFRS US

Fair value is measured in accordance with the Fair value is measured in accordance with the
standard on fair value measurement (see chapter codification topic on fair value measurement (see
2.4). chapter 2.4).

Fair value exemption

IFRS US

Investments in equity instruments that do not have a Unlike IFRS, non-marketable equity securities are
quoted market price in an active market and whose measured at cost subsequent to initial
fair value cannot be reliably measured, and measurement, unless the fair value through profit or
derivatives that are linked to and must be settled by loss option is elected or the securities are required
delivery of such quoted equity instruments, are not to be measured at fair value by specialised industry
measured at fair value subsequent to initial guidance - e.g. for investment companies and
recognition. Such instruments are measured at cost. broker-dealers. [325-20-35]
[IAS 39.46]

Financial instruments denominated in a foreign currency

IFRS US

For monetary items denominated in a foreign Like IFRS, for monetary items denominated in a
currency and measured at amortised cost - e.g. foreign currency and measured at amortised cost -
held-to-maturity debt securities - interest is accrued e.g. held-to-maturity debt securities - interest is
using the effective interest method in the foreign accrued using the effective interest method in the
currency, and translated using the average exchange foreign currency, and translated using the average
rate. Gains and losses on remeasuring the exchange rate. Gains and losses on remeasuring the
investment into the functional currency are investment into the functional currency are
recognised in profit or loss (see chapter 2.7). [IAS recognised in profit or loss (see chapter 2.7), like
21.23(a), 28, 39.AG83, IGE.3.4] IFRS. [830-20-35-1]

For the purpose of recognising foreign exchange Unlike IFRS, the foreign exchange gains and losses
differences, available-for-sale monetary items are on both available-for-sale debt and equity securities
treated as if they were measured at amortised cost are recognised in OCI as part of the change in fair
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 7. Financial instruments (IFRS compared to US GAAP)

in the foreign currency. Accordingly, the foreign value of those instruments and not in profit or loss.
exchange differences arising from changes in [320-10-35-36]
amortised cost are recognised in profit or loss and
not in OCI. [IAS 21.23(a), 28, 39.AG83, IGE.3.4]

The functional currency (see chapter 2.7) fair value Like IFRS, the functional currency (see chapter 2.7)
of a financial instrument is determined by multiplying fair value of a financial instrument is determined by
the fair value in the foreign currency by the spot multiplying the fair value in the foreign currency by
exchange rate at the reporting date. [IAS 21.23(a)] the spot exchange rate at the reporting date. [946-
830-45-9]

Effective interest rate calculation

IFRS US

The 'effective interest rate' is the rate that exactly Like IFRS, the 'effective interest rate' is the rate that
discounts the estimated stream of future cash exactly discounts the estimated stream of future
payments or receipts, without consideration of future cash payments or receipts, without consideration of
credit losses, over the expected life of the financial future credit losses, through to maturity or to the
instrument or through to the next market-based next market-based repricing date, to the net carrying
repricing date, to the net carrying amount of the amount of the financial asset or financial liability on
financial asset or financial liability on initial initial recognition. [310-20-35-17 - 35-26, 835-30-
recognition. [IAS 18.30(a), 39.9, AG5-AG8] 35-2 - 35-3]

The calculation of the effective interest rate takes Unlike IFRS, the calculation of the effective interest
into account the estimated cash flows, which rate is generally based on contractual cash flows.
consider all contractual terms of the financial However, for certain financial instruments (e.g.
instrument - e.g. prepayment, call and similar portfolio of loans receivable), if estimated cash flows
options - but without inclusion of future credit losses. differ from contractual cash flows (e.g. because of
In those rare cases when it is not possible to make a anticipated prepayments and such payments are
reliable estimate of the cash flows or the expected probable and can be reasonably estimated, or loans
life of the financial instrument, or a group of that are credit-impaired at the time of acquisition),
financial instruments, the contractual cash flows then the effective interest rate is based on expected
over the full contractual term are used. [IAS 39.9] rather than contractual cash flows, like IFRS. [310-
20-35-17 - 35-33]

The calculation of the effective interest rate Like IFRS, the effective interest rate of an instrument
considers all contractual terms attached to an includes the principal amount adjusted by fees or
instrument, including any embedded derivatives (e.g. costs and any purchase premium or discount. Like
prepayment options) that are not subject to IFRS, the effective interest rate incorporates any
separation (see chapter 7.2), all fees and points paid embedded derivatives that are not subject to
or received that are an integral part of the effective separation. Also like IFRS, future credit losses are
interest rate, transaction costs and all other not taken into account. [310-20-35-17 - 35-33, 835-
premiums or discounts. Future credit losses are not 30-35-2 - 35-5]
taken into account. [IAS 39.9]

There are no general exemptions from the Unlike IFRS, the effective interest rate calculation is
requirement to calculate the effective interest rate. not applicable in certain situations - e.g. receivables
(payables) arising from transactions with customers
(suppliers) in the normal course of business due

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 7. Financial instruments (IFRS compared to US GAAP)

within one year on normal trade terms; amounts

that do not require repayment in the future, but
instead will be applied to the purchase price of
property, goods or services, such as deposit
progress payments on construction contracts; and
troubled debt that has been restructured. [470-60-
35-5 - 35-10, 835-30-15-3]

Changes in timing or amount of estimated cash flows (other than impairment)

IFRS US

If there is a change in the timing or amount of The accounting for changes in the estimated future
estimated future cash flows, then the carrying cash flows of financial assets differs from IFRS
amount of the instrument (or group of instruments) because it does not generally result in the revised
is adjusted in the period of change to reflect the carrying amount being recalculated using the original
actual and/or revised estimated cash flows, with a effective interest rate. However, when an entity
corresponding gain or loss recognised in profit or holds a large number of similar loans for which
loss. The revised carrying amount is generally prepayments are probable and reasonably
recalculated by discounting the revised estimated estimable, the entity may consider an estimate of
future cash flows at the instrument's original future principal repayments in the calculation of the
effective interest rate. [IAS 39.AG8] effective yield necessary to apply the effective
interest method, like IFRS. Changes in estimated
prepayments are accounted for by recalculating the
effective yield to reflect actual payments to date and
anticipated future payments, and adjusting the
carrying amount through profit or loss to an amount
that would have existed had the new effective yield
been applied since the acquisition of the loans. For
other assets, changes in estimated cash flows that
do not result in impairment are generally accounted
for prospectively using a revised effective interest
rate, unlike IFRS. [310-20-35-17 - 35-33]

Restructuring of a financial liability

IFRS US

If a modification of a financial liability results in its If a modification of a financial liability results in its
derecognition and recognition of a new financial derecognition and recognition of a new financial
liability, then the effective interest rate of the new liability (see chapter 7.5), then the effective interest
financial liability is calculated based on the revised rate of the new financial liability is generally
terms at the date of modification. In this case, any calculated based on the revised terms at the date of
costs or fees incurred are recognised as part of the the modification, like IFRS. In this case, unamortised
gain or loss on extinguishment and do not adjust the debt issue costs and fees paid to or received from
carrying amount of the new liability. Accordingly, in the creditor are included as part of the gain or loss
our view no transaction costs are included in the on extinguishment and do not adjust the carrying
initial measurement of the new liability unless it can amount of the new liability, like IFRS, whereas fees
be demonstrated incontrovertibly that they relate paid to third parties are capitalised as debt issue

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 7. Financial instruments (IFRS compared to US GAAP)

solely to the new liability instrument and in no way costs associated with the new financial liability,
to the modification of the old liability. This would not unlike IFRS. Like IFRS, if the exchange or
usually be possible but might apply to taxes and modification is not accounted for as an
registration fees payable on execution of the new extinguishment, then fees paid to or received from
liability instrument. If the exchange or modification is the creditor are capitalised and, along with existing
not accounted for as an extinguishment, then any unamortised debt issue costs, are amortised based
costs and fees incurred, including existing on the recomputed effective interest rate on the
unamortised debt issue costs, are recognised as an instrument. Fees paid to third parties are recognised
adjustment to the carrying amount of the liability and in profit or loss, unlike IFRS. [470-50-40-17, 40-18]
amortised over the remaining term of the modified
instrument by recomputing the effective interest rate
on the instrument. [IAS 39.41, AG62]

There are no special requirements in respect of As an exception to the above, and unlike IFRS, for a
troubled debt restructurings, and the above general modification of a financial liability in a troubled debt
principles apply. restructuring, interest expense recognised by the
debtor is based on the interest rate that would
equate the present value of the remaining
contractual cash flows to the carrying amount of the
debt. This results in the use of a below-market rate.
[470-60-35-1 - 35-12]

Instruments acquired in a business combination

IFRS US

At the acquisition date, the fair value of the Like IFRS, effective interest calculations on
instrument and the total cash flows expected over instruments acquired in a business combination
the remaining term of the instrument are used by reflect current market interest rates and are used to
the acquirer to calculate a new original effective recognise interest income or expense in the
interest rate for the instrument. The new original consolidated financial statements of the acquirer.
effective interest rate is used to determine interest [805-20-25]
income or expense in the consolidated financial
statements of the acquirer but has no impact on the
acquiree's financial statements. [IFRS 3.18]

Hedged item in a fair value hedge

IFRS US

When hedge accounting is discontinued, or at any Like IFRS, when hedge accounting is discontinued,
earlier date, the carrying amount of the instrument or at any earlier date, the carrying amount of the
and the total payments to be made over the instrument and the total payments to be made over
remaining term of the instrument are used to the remaining term of the instrument are used to
calculate a revised effective interest rate for the calculate a revised effective interest rate for the
instrument. [IAS 39.92] instrument. [815-25-35-8, 35-9]

Discounts, premiums and pre-acquisition interest

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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

Discounts and premiums are generally recognised Like IFRS, discounts and premiums are recognised
over the expected life of the related instrument using using the effective interest rate. However, unlike
the effective interest rate. The straight-line IFRS, the term over which discounts and premiums
amortisation of discounts or premiums is not are recognised is generally the contractual term of
permitted. Interest that has accrued on an interest- the instrument. Like IFRS, the straight-line
bearing investment before it is acquired is not amortisation of discounts or premiums is not
recognised as income. [IAS 18.32, 39.AG6] permitted. Interest that has accrued on an interest-
bearing investment before it is acquired is not
recognised as income, like IFRS. [310-20-35-17 -
35-33, 835-30-35-2, 35-4]

Impairment

IFRS US

After an impairment loss has been recognised in Like IFRS, after an impairment loss has been
profit or loss, interest income is recognised based on recognised in profit or loss, interest income is
the rate used to discount the future cash flows when recognised based on the rate used to discount the
measuring the amount of the impairment loss. [IAS future cash flows when measuring the amount of the
39.AG93] impairment loss. However, unlike IFRS, entities are
also permitted to recognise interest income on
impaired loans using either the cost-recovery or the
cash-basis method. [310-10-35-39]

Impairment of financial assets

IFRS US

Recognising the impairment of financial assets is a Unlike IFRS, there is not a single overarching
two-step process. First, the entity assesses whether requirement that there be objective evidence of
there is objective evidence that impairment exists for impairment for assessing the impairment of financial
a financial asset or a group of financial assets. This assets. Rather, different impairment models are
assessment is done at least at each reporting date. applied to different categories of financial
If there is no objective evidence of impairment, then instruments.
no further action is generally required. However, if
there is objective evidence of impairment, then the
entity calculates the amount of any impairment loss
and recognises it in profit or loss in that reporting
period. [IAS 39.58]

A financial instrument is considered to be impaired For loans not held for sale, an impairment exists
only if objective evidence indicates that one or more when, based on current information and events, it is
events ('loss events') occurring after its initial probable (likely) that a creditor will be unable to
recognition have an impact on the estimated future collect all amounts due according to the contractual

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 7. Financial instruments (IFRS compared to US GAAP)

cash flows of that asset. [IAS 39.59-60] terms of the loan agreement, like IFRS. Unlike IFRS,
debt securities classified as available-for-sale or
held-to-maturity and equity securities classified as
available-for-sale are impaired when the fair value
of the investment is less than its amortised cost in
the case of debt securities and cost in the case of
equity securities. However, an impairment loss on
these securities is recognised only when the
impairment is considered other-than-temporary,
unlike IFRS. [310-10-35-2, 320-10-35-18, 35-21, 35-
30]

An impairment loss on a debt security classified as

available-for-sale or held-to-maturity is considered
'other than temporary' if the entity has an intention
to sell the security, the entity determines that it is
more likely than not that it will be required to sell the
security before the recovery of the security's
amortised cost, or the security has a credit loss. A
'credit loss' is the difference between the amortised
cost of the security and the present value of cash
flows expected to be collected; the expected cash
flows are discounted at the effective rate implicit in
the security at the date of acquisition. [320-10-35-
33A - 35-33C]

In addition to the general impairment considerations Unlike IFRS, a significant and prolonged decline in
above, an equity instrument is impaired if there has the fair value of an equity security below its cost
been a significant or prolonged decline in the fair may, but would not automatically, result in
value of the equity instrument below its cost. There recognising an other-than-temporary impairment.
are no specific thresholds or bright lines in IFRS for Unlike IFRS, the decline in fair value has to be both
making the assessment of what is 'significant' or significant and prolonged and, unlike IFRS, an entity
'prolonged'. In our view, for equity securities that also considers whether the decline is expected to
are quoted in an active market, the general concepts recover and whether the entity has the intent and
of significance and materiality should apply. We ability to hold the equity security to recovery (other-
believe that: than-temporary assessment). The more severe the
decline in value and the longer the security has been
• a decline in excess of 20 percent impaired, the more likely it is that the impairment is
should generally be regarded as other than temporary. Like IFRS, there are no
significant; and specific thresholds or bright lines in making the
• a decline in a quoted market price assessment of whether impairment is significant and
that persists for nine months should prolonged. However, because this is a judgemental
generally be considered to be area, differences from IFRS may arise in practice.
'prolonged'; however, it may be [320-10-S99-1(a)]
appropriate to consider a shorter
period. [IAS 39.61, IGE.4.10, IU 07-
09]

In our view, if a decline in the fair value of an equity

instrument is significant or prolonged, then there is
objective evidence of impairment and an impairment
loss should be recognised, regardless of how long
management intends to hold the investment.

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 7. Financial instruments (IFRS compared to US GAAP)

A decline in the fair value of an investment in a debt Unlike IFRS, a decline in the fair value of an
instrument below its cost that results from an investment in a debt instrument below its cost that
increase in market interest rates is not itself an results from an increase in interest rates does result
indication of impairment. [IAS 39.59-60] in an impairment loss if the decline is assessed to be
other than temporary. [320-10-35-33F, 35-37]

Impairment loss calculations

Loans and receivables and held-to-maturity investments (Loans and held-to-maturity

securities)

IFRS US

An 'impairment loss' for financial assets measured at Like IFRS, for loans individually assessed for
amortised cost is the difference between the asset's impairment, an 'impairment loss' is the difference
carrying amount and the present value of the between the asset's carrying amount and the
estimated future cash flows discounted at the asset's present value of the estimated future cash flows
original effective interest rate, and is recognised in discounted at the loan's original effective interest
profit or loss in that reporting period. The 'estimated rate. Unlike IFRS, an 'other-than-temporary
future cash flows' include only those credit losses impairment loss' on a held-to-maturity security is the
that have been incurred at the time of the difference between the asset's carrying amount and
impairment loss calculation - i.e. an 'incurred loss its fair value. Also unlike IFRS, an other-than-
model'. Losses expected as a result of future events, temporary impairment loss on a debt security is
no matter how likely, are not taken into account. recognised in profit or loss if the entity has an
[IAS 39.59, 63] intention to sell the security or it is determined to be
more likely than not that the entity will be required
to sell the security before recovery of its amortised
cost less any current-period credit loss. For other-
than-temporarily impaired debt securities for which
a credit loss exists and for which the entity has no
intention to sell and has determined that it is not
more likely than not that it will be required to sell the
security before recovery, the impairment loss is
presented partly in profit or loss (the credit loss
portion) and partly in OCI (the non-credit loss
portion). [320-10-35-22, 35-24, 35-33A - 35-33C,
35-34D]

Unlike IFRS, loans held for sale are recognised at

the lower of cost and fair value on an asset-by-asset
basis. Therefore, there is no need for a separate
impairment loss to be recognised. [310-10-35-49,
948-310-35-1]

Available-for-sale financial assets

IFRS US

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 7. Financial instruments (IFRS compared to US GAAP)

An impairment loss for an available-for-sale financial Like IFRS, an impairment loss for an available-for-
asset is measured as the difference between its sale security is measured as the difference between
cost/amortised cost and fair value. The cumulative its cost/amortised cost and fair value. Unlike IFRS,
loss that had been recognised in OCI is reclassified the other-than-temporary impairment losses on debt
from equity to profit or loss. Furthermore, once an securities are recognised in profit or loss if the entity
investment in equity instruments has been impaired, has an intention to sell the security or it is
all subsequent losses are recognised in profit or loss determined to be 'more likely than not' that the
until the asset is derecognised. [IAS 39.58, 67-69, entity will be required to sell the security before
IGE.4.9] recovery of its amortised cost less any current-
period credit loss. For other-than-temporarily
impaired debt securities for which a credit loss exists
and that the entity has no intention of selling and has
determined that it is not more likely than not that it
will be required to sell the security before recovery,
the impairment loss is presented partly in profit or
loss (the credit loss portion) and partly in OCI (the
non-credit loss portion), unlike IFRS. The other-
than-temporary impairment losses on equity
securities are recognised in profit or loss for the
difference between its cost and its fair value, like
IFRS. Subsequently, additional losses are recognised
in profit or loss only when an additional impairment
is deemed to be other than temporary as described
above, unlike IFRS. [320-10-35]

Hedged assets

IFRS US

The principles for hedge accounting do not override Like IFRS, a financial asset that has been designated
the recognition of impairment losses on the hedged as the hedged item in a fair value hedge remains
item, under either the standard on the impairment of subject to the impairment codification topics
non-financial assets (see chapter 3.10) or the applicable to that item. Like IFRS, the assessment of
financial instruments standards. Therefore, if a impairment is performed based on the carrying
hedged item is impaired, then this impairment is amount of the asset after any adjustment as a result
recognised even if the risk that causes the of applying fair value hedge accounting. When
impairment is being hedged and hedge accounting is assessing impairment, the fair value or cash flows of
being applied. However, the hedge accounting the hedging derivative instrument do not affect the
principles may require a gain on a hedging determination of whether the hedged item is
instrument used to hedge the risk that gave rise to impaired, like IFRS. However, the hedge accounting
the impairment to be recognised simultaneously in principles may require a gain on a hedging
profit or loss and offset (partly) against the instrument used to hedge the risk that gave rise to
recognised impairment. [IAS 39.58] the impairment to be recognised simultaneously in
profit or loss and offset (partly) against the
recognised impairment, like IFRS. [815-25-35-10]

In our view, for assessing whether a decline in fair Like IFRS, for assessing whether a decline in fair
value of an available-for-sale equity investment that value of an available-for-sale equity investment that
is or was a hedged item in a fair value hedge is is or was a hedged item in a fair value hedge is
significant or prolonged, its cost should be adjusted significant or prolonged, its cost should be adjusted
for the effects of the hedge accounting. for the effects of the hedge accounting. [815-25-35-
10]

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 7. Financial instruments (IFRS compared to US GAAP)

Reversals of impairment losses

Loans and receivables and held-to-maturity investments(Loans not held for sale and held-to-
maturity securities)

IFRS US

If, after an impairment loss has been recognised in Like IFRS, if an impairment loss has been recognised
respect of loans and receivables or held-to-maturity through a valuation allowance in respect of loans,
investments, the amount of any previous impairment then any decrease in a previous impairment loss due
loss decreases due to an event occurring subsequent to an event occurring subsequent to the write-down
to the write-down, then the previously recognised is reversed through profit or loss to the extent of the
impairment loss is reversed through profit or loss. previously recognised impairment loss unless, unlike
The reversal is limited to an amount that does not IFRS, an impairment loss has been recognised
state the asset at more than what its amortised cost through a charge-off of the loan or receivable -
would have been in the absence of impairment. [IAS because the charge-off establishes a new cost basis.
39.65] Also unlike IFRS, once impairment is recognised
through profit or loss on a held-to-maturity security,
it may not be reversed subsequently because the
impairment establishes a new cost basis. [310-10-
35-37, 320-10-35-34E]

Available-for-sale financial assets(Available-for-sale securities)

IFRS US

An impairment loss on an available-for-sale equity Unlike IFRS, once an other-than-temporary

instrument may not be reversed through profit or impairment is recognised on an available-for-sale
loss. Any increase in the fair value of such an debt security, it is not subsequently reversed through
instrument after an impairment loss has been profit or loss. Instead, unlike IFRS, increases in
recognised is treated as a revaluation and is expected cash flows result in a prospective
recognised in OCI. [IAS 39.69] adjustment to the effective interest rate. Other
changes in fair value are recognised in OCI. [320-
10-35-35]

If, in a subsequent period, the fair value of an Unlike IFRS, once an other-than-temporary
available-for-sale debt instrument increases and the impairment is recognised on an available-for-sale
increase can be objectively related to an event debt security, the entity continues to estimate the
occurring after the impairment loss was recognised, future cash flows expected to be received. Increases
then the impairment loss is reversed, with the in expected cash flows result in a prospective
amount of the reversal recognised in profit or loss. adjustment to the accretable yield recognised in
[IAS 39.70] profit or loss. Other changes in fair value are
recognised in OCI. [320-10-35-35]

Collective impairment assessment

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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

For financial assets carried at amortised cost, an Like IFRS, similar groups of loans measured at
entity starts the impairment assessment by amortised cost that are not individually significant
considering whether objective evidence of may be assessed for impairment as part of a
impairment exists individually for financial assets portfolio. Like IFRS, if an asset is assessed
that are individually significant and individually or individually for impairment and found to be impaired,
collectively for financial assets that are not then it is not included in a collective assessment for
individually significant. If an individually assessed impairment. Unlike IFRS, securities are not assessed
financial asset has been reviewed and found not to for impairment collectively. [310-10-35-13, 35-15]
be impaired, then it is included in a group of
financial assets with similar credit characteristics
and assessed collectively for impairment. If an asset
is assessed individually for impairment and found to
be impaired, then it is not included in a collective
assessment for impairment. If an entity does not
have a group of assets with similar credit
characteristics, then the additional collective
assessment is not performed. [IAS 39.64, AG 87-88,
IGE.4.7]

Impairment is recognised in respect of losses that Like IFRS, characteristics or risk factors are
have been 'incurred but not reported' that are not identified specifically to support an accrual for losses
yet identified on an individual basis. [IAS 39.AG87, that have been incurred but that have not yet
AG89-AG90] reached the point at which it is probable that
amounts will not be collected on a specific individual
loan. [310-10-35]

Any impairment model used for measuring the Unlike IFRS, US GAAP does not provide specific
impairment of financial assets accounted for at guidance for determining the amount of the
amortised cost incorporates the effect of the time impairment for assets assessed on a collective basis.
value of money. The estimated future cash flows Therefore, although entities may use a methodology
determined for assets assessed for impairment on a similar to IFRS, differences may arise in practice.
collective basis are discounted at a rate that
approximates the original effective interest rate of
the group of assets. A portfolio of similar assets will
have a range of interest rates and therefore
judgement is necessary to determine a discounting
methodology appropriate to that portfolio, which
may result in using the average effective yield if it is
a homogeneous portfolio. [IAS 39.63, AG92]

In our view, a collective evaluation of impairment for Like IFRS, a portfolio approach to impairment is not
available-for-sale financial assets is not required. In appropriate for individual equity securities, because
addition, in our view a portfolio approach to equity securities of different issuers do not have
impairment is not appropriate for individual equity similar risk characteristics, and therefore their equity
instruments, because the equity instruments of price risk differs.
different issuers do not have similar risk
characteristics, and therefore their equity price risk
differs.

Interest income and expense

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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

Interest income and expense are recognised using Interest income and expense are generally
the effective interest method. [IAS 18.29, 30(a), 32, recognised using the effective interest method, like
39.9, AG5-AG8] IFRS. [835-30-20, 835-30-35-2 - 35-3]

Interest, dividends, losses and gains relating to a Like IFRS, interest, dividends, losses and gains are
financial instrument or a component that is a reported in a manner that is consistent with the
financial liability should be recognised in profit or classification of an item as a liability or as equity,
loss. Therefore, dividends on shares wholly although some items are classified under US GAAP
classified as liabilities are reported in the statement differently from IFRS (see chapter 7.3). Therefore,
of comprehensive income using the effective interest like IFRS, dividends classified as liabilities are
method, as are any gains or losses arising on their reported in the statement of comprehensive income
early redemption or refinancing. Dividends on using the effective interest method, as are any gains
redemptions or refinancings of instruments classified or losses arising on early redemption or refinancing
as equity are recognised directly in equity. [IAS of an instrument classified as a liability. Like IFRS,
32.35] dividends and gains or losses on items classified as
equity are recognised directly in equity.

For instruments classified as available-for-sale, Like IFRS, for instruments classified as available-for-
interest is also recognised using the effective sale, interest is recognised using the effective
interest method and the gains and losses recognised interest method and the gains and losses recognised
in OCI are the difference between the amortised in OCI are the difference between the amortised
cost and fair value of an instrument. [IAS 39.55(b)] cost and fair value of an instrument. [320-10-35-1,
35-4, 35-18 - 35-34, 35-36]

Dividend income

IFRS US

Dividend income is recognised when the Like IFRS, dividend income is recognised when the
shareholder's right to receive payment is shareholder's right to receive payment is
established. In our view, the shareholder's right to established. The shareholder's right to receive
receive payment of dividends on quoted investments dividends is generally established on the date the
is normally established on the date when the entity has an obligation to pay dividends, which is
security trades ex-dividend. In our view, for not normally until they are declared or approved.
dividends on unquoted investments, the
shareholder's right to receive payment is normally
established when the shareholders have approved
the dividends. If shareholder approval is not required
for a dividend distribution, then a right to receive
payment is established when the payment of
dividends is binding. [IAS 18.30]

Share dividends

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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

In some cases, shareholders may receive or choose In some cases, shareholders may receive or choose
to receive dividends in the form of additional shares to receive dividends in the form of additional shares
rather than cash. There is no specific guidance on rather than cash. Like IFRS, if the substance of
the treatment of such dividends. In our view, share dividends with a cash alternative is the receipt
dividend income should be recognised for the of a cash dividend, then it is accounted for as such.
amount of the cash dividend alternative, because the
substance of share dividends with a cash alternative
is the payment of a cash dividend, with reinvestment
of the cash in additional shares.

In other cases, an entity may receive bonus shares Unlike IFRS, US GAAP contains guidance on
or other equity instruments on a pro rata basis with determining when bonus shares should be
other ordinary shareholders, with no cash accounted for at fair value or in a manner consistent
alternative. If all ordinary shareholders receive with a stock (share) split.
bonus shares or other equity instruments in
proportion to their shareholdings, then the fair value
of each shareholder's interest should be unaffected
by the bonus issue. In our view, in such
circumstances dividends are not recognised as
revenue because it is not probable that there is an
economic benefit associated with the transaction
that will flow to the investor. [IU 01-10]

Fee income

IFRS US

The accounting treatment of fee income related to Like IFRS, the accounting treatment of fee income
interest-bearing instruments depends on whether related to interest-bearing instruments depends on
the fees are an integral part of the effective yield of whether the fees are an integral part of the effective
the instrument. Financial services fees are classified yield of the instrument. Fees are classified as
as origination fees, commitment fees and origination fees, commitment fees and syndication
syndication fees. [IAS 18.IE14, 39.AG64] fees. [310-10-25-19 - 25-20, 310-20-20, 25-1 - 25-
2, 25-11 - 25-14]

Fees that are an integral part of the effective yield of Like IFRS, loan origination fees and commitment
an instrument - e.g. origination or commitment fees, fees and costs are recognised as an adjustment to
compensation from the borrower for transaction the effective interest rate of the instrument over the
costs incurred by the lender or appraisal fees for life of the loan; however, the items included in this
evaluating collateral - are recognised as an determination differ in some respects from IFRS.
adjustment to the effective interest rate of the Like IFRS, if the financial instrument is measured at
instrument. However, if the financial instrument is fair value through profit or loss - e.g. when the fair
measured at fair value through profit or loss, then value option is elected; see chapter 7.4 - then the
the fees are recognised as revenue on initial fees are recognised as revenue on initial recognition
recognition of the instrument. [IAS 18.IE14] of the instrument. [310-20-35-1 - 35-12]

In some cases, it may be difficult to determine Like IFRS, in some cases it may be difficult to
whether an amount charged to a customer at the determine the nature of a specific fee. Like IFRS,

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 7. Financial instruments (IFRS compared to US GAAP)

inception of a loan represents a fee for structuring there are specific requirements relating to
the loan or part of the transaction price for the syndication and commitment fees. Like IFRS, such
financial asset and/or the fair value of the financial fees are recognised when the syndication is
asset on initial recognition. A syndication fee that complete, unless a portion of the loan is retained on
meets specific conditions is recognised as revenue terms different than other participants'. [310-20-20,
when the syndication has been completed. There 310-20-25-1 - 25-2, 25-11 - 25-14, 25-19 - 25-20]
are also specific requirements relating to
commitment fees. If the fee is regarded as a
structuring fee, then revenue is recognised
immediately. However, if the fee is regarded as part
of the transaction price for the loan, then the
recognition of revenue is precluded unless the entity
determines that the fair value of the loan at initial
recognition differs from the transaction price and the
fair value is determined by applying a valuation
technique that uses only data from observable
markets. [IAS 18.IE14]

Financial services fees that are not an integral part Like IFRS, financial services fees that are not an
of the effective yield of an instrument are generally integral part of the effective yield of an instrument
recognised as services are provided or on the are generally recognised as the services are
execution of a significant act (see chapter 4.2). provided or on the execution of a significant act (see
chapter 4.2).

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 7. Financial instruments (IFRS compared to US GAAP)

7.7 Hedge accounting

IFRS US

(IAS 39, IFRIC 16) (ASC Topic 815)

Overview

IFRS US

• Hedge accounting allows an entity to • Like IFRS, hedge accounting allows

selectively measure assets, liabilities an entity to selectively measure
and firm commitments on a basis assets, liabilities and firm
different from that otherwise commitments on a basis different
stipulated in IFRS, or to defer the from that otherwise stipulated in US
recognition in profit or loss of gains GAAP, or to defer the recognition in
or losses on derivatives. profit or loss of gains or losses on
derivatives.

• Hedge accounting is voluntary; • Like IFRS, hedge accounting is

however, it is permitted only if strict voluntary; however, it is permitted
documentation and effectiveness only if strict documentation and
requirements are met. effectiveness requirements are met.

• There are three hedge accounting • Like IFRS, there are three hedge
models: fair value hedges of fair accounting models: fair value
value exposures; cash flow hedges hedges of fair value exposures; cash
of cash flow exposures; and net flow hedges of cash flow exposures;
investment hedges of foreign and net investment hedges of
currency exposures on net foreign currency exposures on net
investments in foreign operations. investments in foreign operations.
However, the requirements differ
from IFRS in certain respects.

• Qualifying hedged items can be • Like IFRS, qualifying hedged items

recognised assets or liabilities, can be recognised assets or
unrecognised firm commitments, liabilities, unrecognised firm
highly probable forecast transactions commitments, highly probable
or net investments in foreign forecast transactions or net
operations. investments in foreign operations.
Unlike IFRS, a portfolio hedge of
interest rate risk, a portion of a
portfolio of financial assets or
financial liabilities that share the risk
being hedged is not allowed under

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 7. Financial instruments (IFRS compared to US GAAP)

US GAAP. In addition, the details

differ in certain respects from IFRS.
Also unlike IFRS, US GAAP restricts
the hedged risk to the entire risk of
changes in cash flows or fair value,
benchmark interest rate risk,
currency risk or counterparty credit
risk in a hedged item.

• In general, only derivative • Like IFRS, in general only derivative

instruments entered into with an instruments qualify as hedging
external party qualify as hedging instruments. Like IFRS, for hedges
instruments. However, for hedges of of foreign exchange risk exposure of
foreign exchange risk only, non- a net investment in a foreign
derivative financial instruments may operation, non-derivative financial
qualify as hedging instruments. instruments may qualify as hedging
instruments. However, unlike IFRS,
for foreign currency fair value
hedges of unrecognised firm
commitments, non-derivative
financial instruments may qualify as
hedging instruments. Also unlike
IFRS, intra-group derivatives can be
used as hedging instruments in
certain circumstances.

• The hedged risk should be one that • Like IFRS, the hedged risk should be
could affect profit or loss. one that could affect profit or loss.

• Effectiveness testing is conducted on • Like IFRS, effectiveness testing is

both a prospective and a conducted on both a prospective and
retrospective basis. For a hedge to a retrospective basis. Unlike IFRS,
be 'effective', changes in the fair the 80-125 percent range is not
value or cash flows of the hedged specified. However, this range is
item attributable to the hedged risk very commonly used in practice and
should be offset by changes in the the SEC staff has indicated that this
fair value or cash flows of the is an acceptable range. Unlike IFRS,
hedging instrument within a range of hedging instruments meeting very
80-125 percent. restrictive criteria are accounted for
as if they are perfectly effective
without testing effectiveness.

• Hedge accounting is discontinued • Like IFRS, hedge accounting is

prospectively if: the hedged discontinued prospectively if: the
transaction is no longer highly hedged transaction is no longer
probable; the hedging instrument probable; the hedging instrument
expires or is sold, terminated or expires or is sold, terminated or
exercised; the hedged item is sold, exercised; the hedged item is sold,
settled or otherwise disposed of; or settled or otherwise disposed of; or
the hedge is no longer highly the hedge is no longer highly
effective. effective. However, the
requirements differ in certain
respects from IFRS.

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 7. Financial instruments (IFRS compared to US GAAP)

Hedge accounting models

IFRS US

There are three hedge accounting models, and the Like IFRS, there are three hedge accounting models,
type of model applied depends primarily on whether and the type of hedge accounting model applied
the hedged exposure is a fair value exposure, a cash depends on whether the hedged exposure is a fair
flow exposure or a foreign currency exposure on a value exposure, a cash flow exposure or a foreign
net investment in a foreign operation. [IAS 39.86] currency exposure on a net investment in a foreign
operation. However, the requirements differ in
certain respects from IFRS. [815-20-05-2]

Fair value hedges

IFRS US

A 'fair value hedge' is a hedge of changes in the fair Like IFRS, a 'fair value hedge' is a hedge of changes
value of a recognised asset or liability, an in the fair value of a recognised asset or liability, an
unrecognised firm commitment, or an identified unrecognised firm commitment, or an identified
portion of such an asset, liability or firm portion of such an asset, liability or firm
commitment, that is attributable to a particular risk commitment, that is attributable to a particular risk
and could affect profit or loss. [IAS 39.86(a)] and could affect profit or loss. However, because US
GAAP has more guidance on the concept of a firm
commitment, differences from IFRS may arise in
practice. [815-20-20]

A hedge of the foreign currency risk of a firm Like IFRS, a hedge of the foreign currency risk on a
commitment may be accounted for as either a fair firm commitment may be accounted for as either a
value hedge or a cash flow hedge. [IAS 39.87] fair value hedge or a cash flow hedge. [815-20-25-
12(f)(3), 25-15(i)(1)]

If the hedging instrument is a derivative, then it is Like IFRS, the derivative hedging instrument is
measured at fair value with changes in fair value measured at fair value with changes in fair value
recognised in profit or loss. The hedged item is recognised in profit or loss. The hedged item is
remeasured to fair value in respect of the hedged remeasured to fair value in respect of the hedged
risk, even if it is normally measured at amortised risk, even if it is normally measured at cost, like
cost. Any resulting adjustment to the carrying IFRS. Also like IFRS, any resulting adjustment to the
amount of the hedged item related to the hedged carrying amount of the hedged item related to the
risk is recognised in profit or loss, even if such a hedged risk is recognised in profit or loss, even if
change would normally be recognised in OCI. [IAS such a change would normally be recognised in OCI.
39.89] [815-20-35-1(b)]

For a hedge of a firm commitment, fair value hedge Like IFRS, for a hedge of a firm commitment, fair
accounting results in the change in fair value of the value hedge accounting results in the change in fair
firm commitment attributable to the hedged risk value of the firm commitment attributable to the
during the period of the hedging relationship being hedged risk during the period of the hedging
recognised as an asset or a liability in the statement relationship being recognised as an asset or a
of financial position. When the hedged transaction is liability in the statement of financial position. Like
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 7. Financial instruments (IFRS compared to US GAAP)

recognised, the amount previously recognised in the IFRS, when the hedged transaction is recognised the
statement of financial position adjusts the initial amount previously recognised in the statement of
measurement of the underlying transaction (basis financial position adjusts the initial measurement of
adjustment). [IAS 39.93-94] the underlying transaction (basis adjustment). [815-
25-35-8, 40-5(a)]

Cash flow hedges

IFRS US

A 'cash flow hedge' is a hedge of the exposure to Like IFRS, a 'cash flow hedge' is a hedge of the
variability in cash flows that is attributable to a exposure to variability in cash flows that is
particular risk associated with a recognised asset or attributable to a particular risk associated with a
liability, or a highly probable forecast transaction, recognised asset or liability, or a probable forecast
and that could affect profit or loss. [IAS 39.86(b)] transaction that could affect profit or loss. However,
the details differ in certain respects from IFRS. [815-
20-20]

If the hedging instrument is a derivative, then it is Like IFRS, a derivative hedging instrument is
measured at fair value with the effective portion of measured at fair value with the effective portion of
changes in its fair value recognised in OCI and changes in its fair value recognised in OCI, and
presented as a separate component of equity. becomes a component of accumulated OCI.
Ineffectiveness due to the derivative's change in fair Ineffectiveness due to the derivative's change in fair
value being greater than the change in the hedge value being greater than the change in the hedge
item's value is recognised immediately in profit or item's value is recognised immediately in profit or
loss. [IAS 39.95-96] loss, like IFRS. [815-20-35-1(c)]

If the hedging instrument is a non-derivative Unlike IFRS, a non-derivative may not be designated
monetary item, which is permitted only for hedges of as a hedging instrument in a cash flow hedge. [815-
foreign currency risk, then the effective portion of 20-25-71]
the foreign currency gains and losses on the hedging
instrument is recognised in OCI. [IAS 39.72]

The change in the fair value of the hedging Like IFRS, the change in the fair value of the hedging
instrument that is recognised in OCI is reclassified to instrument that is recognised in accumulated OCI is
profit or loss when the hedged item affects profit or reclassified to profit or loss when the hedged item
loss, as follows. affects profit or loss, as follows.

If the future transaction results in the recognition of If the future transaction results in the recognition of
a non-financial asset or a non-financial liability, then a non-financial asset or a non-financial liability, then
an entity may either include the cumulative amount the entity leaves the amount in accumulated OCI and
in equity in the initial carrying amount of that asset reclassifies it to profit or loss as the related asset or
or liability (basis adjustment), or retain the amount liability affects profit or loss. The same applies to a
in equity and reclassify it to profit or loss in the forecast transaction of a non-financial asset or a
period during which the related asset or liability non-financial liability that becomes a firm
affects profit or loss. The same choice applies to a commitment for which fair value hedge accounting is
forecast transaction of a non-financial asset or a subsequently applied, like IFRS. Unlike IFRS, a basis
non-financial liability that becomes a firm adjustment approach is not permitted.

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 7. Financial instruments (IFRS compared to US GAAP)

commitment for which fair value hedge accounting is

subsequently applied. An entity should choose an • If the future transaction results in
accounting policy to be applied consistently to all the acquisition of a financial
cash flow hedges of transactions that lead to the instrument, then the amount
recognition of non-financial assets or non-financial deferred in accumulated OCI
liabilities. remains there and is reclassified to
profit or loss in the period(s) during
• If the future transaction results in which the financial instrument
the acquisition of a financial affects profit or loss, like IFRS. [815-
instrument, then the amount 20-35-1(c), 815-30-35-3, 815-30-
deferred in OCI remains there and is 35-38 - 35-41]
reclassified to profit or loss in the
period(s) during which the financial
instrument affects profit or loss.
[IAS 39.97-100]

Net investment hedges

IFRS US

A 'net investment hedge' is a hedge of the foreign Like IFRS, a 'net investment hedge' is a hedge of the
currency exposure arising from a net investment in a foreign currency exposure arising from a net
foreign operation using a derivative, and/or a non- investment in a foreign operation using a derivative,
derivative financial item, as the hedging instrument. or a non-derivative monetary item, as the hedging
[IAS 39.86(c)] instrument. However, the requirements differ in
certain respects from IFRS. [815-35]

The hedged risk is the foreign currency exposure Like IFRS, the hedged risk is the foreign currency
arising from a net investment in that foreign exposure on the designated carrying amount of the
operation when the net assets of the foreign net assets of the foreign operation in the financial
operation are included in the financial statements. statements. Also like IFRS, the hedged risk cannot
The hedged risk cannot be designated as the fair be designated as the fair value of the underlying
value of the underlying shares, or the currency shares, or the currency exposure on the fair value of
exposure on the fair value of the shares. [IAS the shares. [815-20-25-23 - 25-33, 25-43]
39.AG99]

The hedged item may be an amount of net assets Like IFRS, the hedged item may be an amount of net
equal to or less than the carrying amount of the net assets equal to or less than the carrying amount of
assets of the foreign operation at the beginning of the net assets of the foreign operation at the
any given period in respect of a foreign currency beginning of any given period in respect of a foreign
exposure. [IFRIC 16.2, 11] currency exposure. [815-35-35-27, 55-1]

A derivative, a non-derivative instrument or a Like IFRS, a derivative or a non-derivative

combination of both may be used as the hedging instrument may be used as the hedging instrument.
instrument. The hedging instrument can be held by Unlike IFRS, a combination of a derivative and non-
any entity within the group. [IFRIC 16.14] derivative instrument cannot be used as the hedging
instrument in one relationship. Also unlike IFRS,
within the consolidated group the party to the
derivative hedging instrument should be either the
operating unit with the foreign currency exposure or
another member of the consolidated group that has

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 7. Financial instruments (IFRS compared to US GAAP)

the same functional currency and for which there is

no intervening subsidiary with a different functional
currency. [815-20-25-30, 25-66]

The effective portion of the gain or loss on the Like IFRS, the effective portion of the gain or loss on
hedging instrument is recognised in OCI as an offset the hedging instrument is recognised in OCI as an
to the foreign currency translation reserve in respect offset to the foreign currency translation of that
of that foreign operation. Any ineffectiveness is foreign operation. Any ineffectiveness is recognised
recognised in profit or loss immediately. [IAS in profit or loss immediately, like IFRS. [815-20-35-1
39.102, IFRIC 16.3] (d)]

Hedge accounting conditions

IFRS US

The following conditions apply to all three types of The general conditions for hedge accounting for all
hedges. Hedge accounting is permitted only if all of three types of hedges under US GAAP are as
the following conditions are met. follows.
• There is formal designation and • Like IFRS, at inception of the hedge
written documentation at inception there is formal designation and
of the hedge that identifies: written documentation of the
hedging relationship and the entity's
- the hedging instrument, the risk management objective and
hedged item and the risk being strategy for undertaking the hedge,
hedged; including identification of the
- the risk management objective hedging instrument, the hedged
and strategy for undertaking the item, the nature of the risk being
hedge; and hedged and how the hedging
instrument's effectiveness in
- how effectiveness will be offsetting the exposure to changes in
assessed, both prospectively and the hedged item's fair value or cash
retrospectively. flows attributable to the hedged risk
will be assessed and, unlike IFRS,
• The hedge is expected to be highly
there is an explicit requirement to
effective in achieving fair value or
state how ineffectiveness will be
cash flow offsets in accordance with
measured.
the original documented risk
management strategy. • Both at inception of the hedge and
on an ongoing basis, the hedging
• The effectiveness of the hedge can
relationship is expected to be highly
be measured reliably. This requires
effective in achieving offsetting
the fair value of the hedging
changes in fair value or cash flows
instrument, and the fair value (or
attributable to the hedged risk
cash flows) of the hedged item with
during the period for which the
respect to the risk being hedged, to
hedge is designated, like IFRS.
be reliably measurable.
However, the effectiveness testing
• The hedge is assessed and requirements differ in certain
determined to be highly effective on respects from IFRS (see below).

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 7. Financial instruments (IFRS compared to US GAAP)

an ongoing basis throughout the

• US GAAP does not have an explicit
hedge relationship. A hedge is
requirement that the effectiveness of
'highly effective' if changes in the
the hedge can be measured reliably,
fair value of the hedging instrument,
unlike IFRS. However, we do not
and changes in the fair value or
expect differences to arise in
expected cash flows of the hedged
practice.
item attributable to the hedged risk,
offset within the range of 80-125 • Like IFRS, for a cash flow hedge of a
percent. forecast transaction, the transaction
is probable and creates an exposure
• For a cash flow hedge of a forecast
to variability in cash flows that
transaction, the transaction is highly
ultimately could affect profit or loss.
probable and creates an exposure to
Under US GAAP, a forecast
variability in cash flows that
transaction needs to be probable of
ultimately could affect profit or loss.
occurring, whereas under IFRS it
IFRS does not define what is meant
needs to be 'highly probable.'
by a forecast transaction that is
However, in our experience the
'highly probable' of occurring. [IAS
application of 'probable' under US
39.88]
GAAP and 'highly probable' under
IFRS is often the same. Like IFRS,
there is no specific guidance on
what percentage probability
constitutes probable of occurring.
[815-20-25-15]

Under US GAAP, there are additional criteria that

need to be met for fair value, cash flow and net
investment hedges, which differ from IFRS. [815-20-
25-4 - 25-44, 25-87 - 25-97, 25-72 - 25-132]

Risk exposure is assessed on a transaction basis, Like IFRS, risk exposure is assessed on a transaction
and entity-wide risk is not a condition for hedge basis, and entity-wide risk is not a condition for
accounting. [IAS [Link].2.6] hedge accounting. [815-20-25]

Qualifying hedged items

IFRS US

The hedged item is an item that exposes the entity The qualifying hedged items under US GAAP are like
to risk of changes in fair value or future cash flows IFRS except that, as described below, US GAAP
that an entity has chosen to designate as a hedged restricts the hedged risk to the entire risk of changes
item. The hedged item can be: in cash flows or fair value, benchmark interest rate
risk, currency risk or counterparty credit risk in a
• a single recognised asset or liability, hedged item. [815-20-25-4 - 25-44]
unrecognised firm commitment,
highly probable forecast transaction
or net investment in a foreign
operation;
• a group of recognised assets or
liabilities, unrecognised firm
commitments, highly probable

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 7. Financial instruments (IFRS compared to US GAAP)

forecast transactions or net

investments in foreign operations, if
they share the same hedged risk; or
• in a portfolio hedge of interest rate
risk, a portion - i.e. an amount of
currency - of a portfolio of financial
assets or financial liabilities that
share the risk being hedged. [IAS
39.78]

A firm commitment to acquire a business in a Unlike IFRS, a business combination is not a

business combination can be a hedged item only for qualifying hedged item. [815-10-15-74]
foreign exchange risk because other risks cannot be
specifically identified and measured. In our view, an
entity may also hedge the foreign exchange risk of a
highly probable forecast business combination. In
our view, in the consolidated financial statements, a
cash flow hedge of the foreign exchange risk of a
firm commitment to acquire a business or a forecast
business combination relates to the foreign currency
equivalent of the consideration paid. [IAS 39.AG98]

There are no restrictions on the timing of Like IFRS, there are no restrictions on the timing of
designation or redesignation of a hedged item and designation or redesignation of a hedged item and
an item may be hedged after its initial recognition. an item may be hedged after its initial recognition.
[IAS [Link].2.17] [815-20-25-4 - 25-44]

Hedging a portion

IFRS US

It is possible to designate only a portion of the cash Like IFRS, it is possible to designate only a portion of
flows, fair value or net investment as a hedged item. the cash flows, fair value or net investment as a
If a portion of the cash flows of a financial asset or hedged item. However, US GAAP has more specific
financial liability is designated as the hedged item, and restrictive guidance on hedging portions, and
then the designated portion needs to be less than therefore differences in practice exist. [815-20-25-
the total cash flows of the asset or liability. The 11 - 25-12, 25-37, 25-41]
designated risks and portions need to be separately
identifiable components of the financial instrument,
and changes in cash flows or the fair value of the
entire financial instrument arising from the changes
in the designated risks and portions need to be
reliably measurable. [IAS 39.81, AG99E-AG99F]

For example, for a fixed-rate financial instrument Unlike IFRS, a portion of the coupon on a fixed-rate
hedged for changes in fair value attributable to instrument cannot be designated as a hedged
changes in a risk-free or benchmark interest rate, component. [815-20-25-10 - 25-11]
the risk-free or benchmark rate is normally regarded
as both a separately identifiable component of the
financial instrument and reliably measurable. [IAS

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 7. Financial instruments (IFRS compared to US GAAP)

39.AG99C]

An item may be hedged for only a portion of its Even though partial-term hedging is not prohibited, it
period to maturity (partial-term hedging). [IAS is difficult under US GAAP to achieve effectiveness
[Link].2.17] for a fair value hedge of only selected contractual
cash flows because, unlike IFRS, excluding a hedged
item's cash flows for only a portion of its time period
when assessing effectiveness and measuring
ineffectiveness is prohibited. [815-20-55-5 - 55-8]

Hedging a proportion

IFRS US

The term 'portion' is distinct from the term Like IFRS, it is possible to designate a proportion of
'proportion', the latter being used to indicate a the cash flows, fair value or net investment as a
certain percentage only. It is possible to designate a hedged item. Like IFRS, once a partial designation is
proportion of the cash flows, fair value or net made, hedge effectiveness is measured on the basis
investment as a hedged item. However, once a of the hedged exposure. [815-20-25-10]
partial designation is made, hedge effectiveness is
measured on the basis of the hedged exposure. [IAS
39.81, AG107A]

If a proportion of the cash flows or fair value of a Like IFRS, if a proportion of the cash flows or fair
financial asset or financial liability is designated as value of a financial asset or financial liability is
the hedged item, then that designated proportion designated as the hedged item, then that designated
should be less than the total cash flows of the asset proportion needs to be less than the total cash flows
or liability. However, an entity may designate all of of the asset or liability. Also like IFRS, an entity may
the cash flows of the entire financial asset or designate all of the cash flows of the entire financial
financial liability as the hedged item and hedge them asset or financial liability as the hedged item and
for only one particular risk as long as it is one of the hedge them for only one particular risk, as long as
eligible specified risks. [IAS 39.AG99C] the hedged risk is one of the eligible specified risks.
As discussed above, the eligible risks may differ
from IFRS. [815-20-25-6 - 25-44]

Portfolio fair value hedges of interest rate risk

IFRS US

An entity is permitted to designate the interest rate The portfolio hedging model is not allowed under US
exposure of a portfolio of financial assets or financial GAAP. Unlike IFRS, an entity is not permitted to
liabilities as the hedged item based on expected designate a hedged item in a fair value hedge based
rather than contractual cash flows under the on expected cash flows. Also unlike IFRS, a hedged
portfolio fair value hedge model. Although the item may not be designated in terms of an amount
hedged item may include both assets and liabilities, of currency rather than as individual assets or
the amount designated is an amount of assets or an liabilities. [815-20-25-12]
amount of liabilities; designation of a net amount
comprising both assets and liabilities is not

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 7. Financial instruments (IFRS compared to US GAAP)

permitted. The entity may also hedge a portion of

the interest rate risk associated with the designated
amount. The portfolio fair value hedge model can be
applied only for hedges of interest rate risk. [IAS
39.78, 81A, AG114(b)-AG114(c), AG116, AG118]

Net positions

IFRS US

A net position may not be a hedged item, although a Like IFRS, a net position may not be a hedged item,
portion of the assets or liabilities making up the net although a portion of the assets or liabilities making
position may be designated as the hedged item.[IAS up the net position may be designated as the hedged
39.AG101] item. [815-20 25-12]

Hedging groups of similar items

IFRS US

The hedged item can be a portfolio of similar assets, Like IFRS, similar assets, liabilities, unrecognised
liabilities, unrecognised firm commitments, highly firm commitments, probable forecast transactions or
probable forecast transactions or net investments in net investments in foreign operations may be
foreign operations. Only similar items can be aggregated and hedged as a group only if the
grouped together in a portfolio. Items are individual items in the group share the risk exposure
considered to be 'similar' if: that is designated as being hedged. Also like IFRS,
the change in fair value attributable to the hedged
• they share the hedged risk; and risk for each individual item in the group should be
• the change in fair value attributable expected to be approximately proportional to the
to the hedged risk for each individual overall change in fair value attributable to the
item is expected to be approximately hedged risk of the group of items. However, the
proportional to the overall change in details differ in certain respects from IFRS. [815-20-
the fair value of the portfolio 25-12(b)]
attributable to the hedged risk. [IAS
39.83, BC176]

Qualifying hedging instruments

IFRS US

All derivatives, including separable embedded All derivatives, including separable embedded
derivatives, can qualify as hedging instruments, with derivatives, can qualify as hedging instruments, with
the following limitations. the following limitations.
• Written options may be designated • Unlike IFRS, the use of written
as hedging instruments only of options as hedging instruments is
purchased options. not restricted to hedges of

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 7. Financial instruments (IFRS compared to US GAAP)

purchased options; however,

• A derivative may not be designated additional hedge criteria apply (see
as a hedging instrument for only a below).
portion of its remaining period to
maturity. • Like IFRS, a derivative may not be
designated as a hedging instrument
• Derivatives in their entirety or a for only a portion of its remaining
proportion thereof need to be period to maturity.
designated as hedging instruments.
Designation of only certain • Like IFRS, derivatives in their
components of derivatives is not entirety or a proportion thereof need
permitted, except as noted below. to be designated as hedging
[IAS 39.72, 74-75, AG94] instruments. Designation of only
certain components of derivatives is
not permitted. [815-20-25-45 - 25-
71]

There are two exceptions from the requirement not Unlike IFRS, the intrinsic value component or the
to split the components of derivative hedging spot price element of a hedging instrument cannot
instruments: separating the intrinsic value and time be designated as a hedging instrument. However,
value of an option; and separating the interest the entire hedging instrument may be designated
element and the spot price element in a forward. and hedge effectiveness may be based on only the
[IAS 39.74] intrinsic value of an option or on the spot price
element of a forward contract. [815-20-25-82]

A written option may not be designated as a hedging Unlike IFRS, a written option may be designated as a
instrument unless the hedged item is a purchased hedge of a recognised asset or liability or
option, including one that is embedded in, but not unrecognised firm commitment, or related variability
separated from, another contract. [IAS 39.AG94] in cash flows, but only if the combination of the
hedged item and the written option provides at least
as much potential for gains as a result of a
favourable change in the fair value of the combined
instruments as exposure to losses from an
unfavourable change in their combined fair value
(or, for cash flow hedges, at least as much potential
for favourable cash flows as exposure to
unfavourable cash flows). That test is met if all
possible favourable percentage changes in the
underlying (from zero percent to 100 percent) would
provide at least as much gain (or favourable cash
flow) as the loss (or unfavourable cash flow) that
would be incurred from an unfavourable change in
the underlying of the same percentage. [815-20-25-
94 - 25-95]

Non-derivatives may be used as hedging instruments Unlike IFRS, non-derivatives may be used as hedging
only for hedges of foreign currency risk. [IAS 39.72] instruments only for hedges of foreign currency
exposure of a net investment in a foreign operation
and foreign currency fair value hedges of
unrecognised firm commitments. [815-20-25-66, 25-
37(d)]

A combination of derivatives and non-derivatives, or Unlike IFRS, US GAAP prohibits a combination of

proportions thereof, may be used as the hedging derivatives and non-derivatives, or proportions

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 7. Financial instruments (IFRS compared to US GAAP)

instrument. [IAS 39.77] thereof, to be used as the hedging instrument. [815-

20-25-66]

Dynamic hedging strategies

IFRS US

IFRS allows an entity to apply dynamic hedging Like IFRS, US GAAP allows an entity to apply
strategies such as 'delta-neutral' hedging strategies dynamic hedging strategies such as 'delta-neutral'
and other dynamic strategies under which the hedging strategies and other dynamic strategies
quantity of the hedging instrument is constantly under which the quantity of the hedging instrument
adjusted to maintain a desired hedge ratio. [IAS is constantly adjusted to maintain a desired hedge
39.74-75, 91(a), 101(a), IGF.1.9] ratio. However, the details of the application of
hedge accounting to these strategies differ from
IFRS in certain respects. [815-20-25-101]

Qualifying hedged risks

IFRS US

The hedged risk should be one that could affect Like IFRS, the hedged risk should be one that could
profit or loss. [IAS 39.86, AG110] affect profit or loss. [815-20-25-12(c), 25-15(c)(2)]

A financial asset or financial liability can be hedged Unlike IFRS, for a financial asset or financial liability
against exposure to any one or more of its individual an entity is limited to hedging benchmark interest
risk types that are identifiable and reliably rate risk, foreign currency risk, credit risk, overall
measurable, including market prices, interest rates changes in cash flows or fair value, or a combination
or a component of interest rates, foreign currency of one or more of these risks. An entity may not
rates or credit risk. [IAS 39.81, , IGF.3.5] designate a portion of any of these risks as the
hedged risk. [815-20-25-6 - 25-44]

A non-financial item may be hedged with respect to Like IFRS, a non-financial item other than servicing
either all of its risks or foreign currency risk only. rights should be hedged in respect of either all of its
[IAS 39.82, AG100] risks or foreign currency risk only. [815-20-25-12(e)]

The risks associated with treasury share Like IFRS, the risks associated with treasury share
transactions (see chapter 7.3), forecast transactions transactions (see chapter 7.3), forecast transactions
in own equity and distributions to shareholders do in own equity and distributions to shareholders do
not qualify for hedge accounting. [IAS 39.86, AG110] not qualify for hedge accounting. [815-20-25-43(b)
(3)]

To qualify for hedge accounting, the hedged risk Like IFRS, the hedged risk should be specifically
should be specific and identifiable. A hedge against identifiable, and general business risk does not
general business risks does not qualify for hedge qualify for hedge accounting; additionally, under US
accounting. [IAS 39.AG98, AG110, IGF.2.8] GAAP the hedgeable risks are limited to the risks
identified above, which is narrower than IFRS. [815-
20-25-6 - 25-44]

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 7. Financial instruments (IFRS compared to US GAAP)

Lease payments and receipts

IFRS US

IFRS does not contain guidance on whether cash US GAAP does not require operating leases to be
flows under lease agreements are financial or non- considered as non-financial items. For example, a
financial items. In our view, whether cash flows non-cancellable operating lease may be treated as a
payable or receivable under a lease arrangement firm commitment, and therefore may be designated
are financial or non-financial items with respect to as the hedged item in a fair value hedge.
their designation as a hedged item depends on Furthermore, such a firm commitment may be
whether the lease is classified as a finance lease or hedged for total changes in fair value as well as the
an operating lease. following segregated risks: interest rate risk, credit
risk or foreign currency risk. [815-20-25-12(e)]
• A recognised finance lease payable
or receivable is a financial item even
though such an item is not generally
in the scope of the financial
instruments standard dealing with
hedging.
• An operating lease arrangement is
an executory contract. Accordingly,
in our view an operating lease is not
regarded as a financial item.
However, individual payments
currently due and payable with
respect to the elapsed period of the
lease term for which performance
has occurred are financial items.

Effectiveness testing

IFRS US

If a hedge is not perfect, then the gain or loss on the Like IFRS, if a hedge is not perfect, then the gain or
hedging instrument will differ from the gain or loss loss on the hedging instrument will differ from the
on the hedged item. The difference may give rise to gain or loss on the hedged item. The difference may
hedge ineffectiveness. give rise to hedge ineffectiveness. [815-20-25-77]

To qualify for hedge accounting, a hedge should be Like IFRS, to qualify for hedge accounting, a hedge
'expected to be' (prospectively) and 'actually have should be 'expected to be' (prospectively) and
been' (retrospectively) highly effective at inception 'actually have been' (retrospectively) highly effective
and subsequently, which requires the following at inception and subsequently, which requires the
conditions to be met: following conditions to be met:
• the hedge is expected to be highly • the hedge is expected to be highly
effective in achieving offsetting effective in achieving offsetting
changes in fair value or cash flows changes in fair value or cash flows
attributable to the hedged risk attributable to the hedged risk

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 7. Financial instruments (IFRS compared to US GAAP)

during the period for which the during the period for which the
hedge is designated or for the hedge is designated (prospective
period until the amount of the effectiveness), like IFRS; and
hedging instrument is next adjusted
(prospective effectiveness); and • the hedge has actually been highly
effective (retrospective
• the actual results of the hedge are effectiveness); unlike IFRS, the 80-
within the range of 80-125 percent 125 percent range is not specified
(retrospective effectiveness). [IAS under US GAAP, although it is widely
39.88(e), AG105] used and accepted in practice for
both prospective and retrospective
effectiveness and the SEC staff has
indicated that this is an acceptable
range. [815-20-25-72 - 25-132]

Notwithstanding the above, US GAAP allows certain

derivatives to be accounted for as if they are
perfectly effective hedging instruments without
assessing hedge effectiveness, unlike IFRS.
However, this is allowed only in very limited
circumstances. [815-20-25-84, 25-102 - 25-118, 25-
126 - 25-129]

Any actual ineffectiveness is recognised in profit or Like IFRS, any actual ineffectiveness is recognised in
loss immediately, even if the hedge has been 'highly profit or loss immediately, even if the derivative is
effective'. [IAS 39.95(b), 102(b)] 'highly effective' as a hedge. [815-20-35-1(c)]

IFRS does not specify how often effectiveness should Like IFRS, under US GAAP hedge effectiveness
be measured, beyond noting that it should be done should be assessed whenever financial statements
at a minimum at each reporting date, including or profit or loss are reported. However, unlike IFRS,
interim reporting dates. [IAS 39.AG106] there is an explicit requirement to assess
effectiveness at least every three months, regardless
of whether the entity is subject to interim reporting.
[815-20-25-79]

IFRS does not prescribe the methods that should be Like IFRS, US GAAP does not prescribe the methods
used in measuring effectiveness. The method that that should be used in assessing effectiveness. Like
will be used in measuring hedge effectiveness is IFRS, the method that will be used in assessing
specified in the hedge documentation. Different hedge effectiveness is specified in the hedge
methods may be used to measure prospective documentation. Also like IFRS, different methods
effectiveness and retrospective effectiveness for a may be used to assess prospective effectiveness and
single hedge relationship, as well as for different retrospective effectiveness for a single hedge
hedging relationships. [IAS 39.88(a), AG107] relationship. [815-20-25-3]

The approach that will be used to measure Like IFRS, the approach that will be used to measure
effectiveness is determined on a hedge-by-hedge effectiveness is determined on a hedge-by-hedge
basis. There is no requirement to adopt a consistent basis, although an entity will ordinarily use a similar
method for all hedge relationships. However, in our approach for similar hedges. [815-20-25-81]
view an entity should adopt a method for assessing
hedge effectiveness that is applied consistently for
similar types of hedges unless different methods are
explicitly justified. [IAS 39.88(a)]

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 7. Financial instruments (IFRS compared to US GAAP)

Effectiveness calculations may be done on a pre-tax Like IFRS, effectiveness calculations may be done on
or post-tax basis. Whichever method is used, the a pre- or post-tax basis. Whichever method is used,
basis of calculating the change in fair value or cash the basis of calculating the change in fair value or
flows of the hedged item and the change in fair cash flows of the hedged item and the change in fair
value of the hedging instrument should be value of the hedging instrument should be
consistent. [IAS [Link].4.1] consistent, like IFRS. [815-20-25-3(b)(vi)]

Prospective and retrospective effectiveness Prospective and retrospective effectiveness

Prospective effectiveness may be demonstrated Like IFRS, prospective effectiveness may be

using statistical or offset methods or by comparing demonstrated using statistical or offset methods or
all critical terms. 'Comparing all critical terms' does by comparing the critical terms. [815-20-25-84]
not mean applying the 'short-cut method' as allowed
under US GAAP. [IAS 39.AG105, IG.F.4.4] Also like IFRS, retrospective effectiveness may be
demonstrated using statistical or other offset
Retrospective effectiveness is demonstrated using methods and it may be assessed on a cumulative or
statistical or offset methods and is measured on a period-by-period basis. Unlike IFRS, there are
cumulative or period-by-period basis. However, the several methods that can be used under US GAAP
actual ineffectiveness recognised in profit or loss is that allow the assumption of perfect effectiveness:
calculated using the offset method. IFRS does not
permit the 'critical terms match' approach to test • the short-cut method, whereby the
retrospective effectiveness. [IAS 39.AG105, IG.F.5.5] hedge of a recognised interest-
bearing asset or liability for the
changes in the benchmark interest
rate with interest rate swaps is
considered perfectly effective,
assuming that there have been no
changes in terms related to the
interest rate swap and the hedged
asset or liability and other stringent
criteria are met;
• the critical terms match, whereby
the hedge of a forecast transaction
with forwards or futures is
considered perfectly effective,
assuming that there have been no
changes in terms related to the
hedging instrument and hedged
transaction and other criteria are
met, including matching the critical
terms; and

the terminal value approach, whereby the hedge of

a one-sided risk in a cash flow hedge using
purchased options is considered perfectly effective,
assuming that there have been no changes in terms
related to the hedging instrument and hedged
transaction and other criteria are met, including
matching the critical terms. [815-20-25-126 - 25-
129]

For hedging relationships that use a purchased Like IFRS, a purchased option's time value may be
option as the hedging instrument, the time value of excluded from the assessment of hedge
an option may be excluded from the effectiveness effectiveness. However, unlike IFRS, if certain

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 7. Financial instruments (IFRS compared to US GAAP)

tests and effectiveness may be tested based solely conditions are met for a hedge of a one-sided risk in
on the intrinsic value of the option. [IAS 39.74, a cash flow hedge using a purchased option, then
AG105, IGF.4.4, IGF.5.5] effectiveness may be assessed by comparing the
changes in a purchased option's total fair value to a
hypothetical derivative that would be considered
perfectly effective under the terminal value approach
noted above. [815-20-25-82, 25-79, 25-98, 25-126 -
25-129, 820-20-25-84, 25-102 - 25-118]

Actual ineffectiveness

IFRS US

In a cash flow hedge, regardless of the methods that The US GAAP guidance on recording actual
are used to assess prospective and retrospective ineffectiveness is like IFRS, unless the short-cut
effectiveness, the actual ineffectiveness recognised method, critical terms match or terminal value
in profit or loss is calculated using the offset method approach (see above) are used. Under these three
on a cumulative basis to ensure that all methods, the hedge is considered perfectly effective
ineffectiveness is recognised in profit or loss and no ineffectiveness is recognised in profit or loss.
immediately. If the cumulative gain or loss on the [815-20-25-84, 25-102 - 25-118, 25-126 - 25-129]
hedging instrument is more than the cumulative
change in fair value of the expected future cash
flows on the hedged item, then the excess is
recognised in profit or loss as ineffectiveness.
However, if the reverse applies, then no
ineffectiveness is recognised in profit or loss. [IAS
39.96, IGF.5.5]

In a fair value hedge, ineffectiveness is recognised Like IFRS, in a fair value hedge ineffectiveness is
automatically in profit or loss as a result of recognised automatically in profit or loss as a result
separately remeasuring the hedging instrument and of separately remeasuring the hedging instrument
the hedged item. No separate calculation is required and the hedged item. No separate calculation is
of the amount of ineffectiveness to be recognised in required of the amount of ineffectiveness to be
profit or loss. [IAS 39.89] recognised in profit or loss. [815-20-35-1(b)]

For hedging relationships that use a purchased Like IFRS, a purchased option's time value may be
option as the hedging instrument, the time value of excluded from the measurement of hedge
an option may be excluded from the effectiveness ineffectiveness. If time value is excluded from
tests and effectiveness may be tested based solely measuring hedge ineffectiveness, then changes in
on the intrinsic value of the option. However, in this the option's time value are recognised directly in
case, changes in the option's time value are profit or loss, like IFRS. However, unlike IFRS, if
recognised directly in profit or loss, regardless of the certain conditions are met for a hedge of a one-
hedging model used. [IAS 39.74, 96(c)] sided risk in a cash flow hedge using a purchased
option, then ineffectiveness may be measured by
comparing the changes in the purchased option's
total fair value with a hypothetical derivative that
would be considered perfectly effective according to
the terminal value approach noted above. [815-20-
25-82, 25-83, 25-126 - 25-129]

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 7. Financial instruments (IFRS compared to US GAAP)

Effect of credit risk on effectiveness testing

IFRS US

For all hedges, changes in both counterparty credit Like IFRS, for all hedges changes in both
risk and own credit risk impact the measurement of counterparty credit risk and own credit risk impact
changes in the fair value of a derivative hedging the measurement of changes in the fair value of a
instrument. These changes would probably have no derivative hedging instrument. These changes would
offsetting effect on the measurement of the changes probably have no offsetting effect on the
in the value of the hedged item attributable to the measurement of the changes in the value of the
hedged risk and may lead to a conclusion that the hedged item attributable to the hedged risk and may
hedging relationship has not been and/or is not lead to a conclusion that the hedging relationship
expected to be highly effective. For all hedges, an has not been and/or is not expected to be highly
entity considers the risk that the counterparty to the effective. However, unlike IFRS, until the likelihood
hedging instrument will default by failing to make that the counterparty will not default ceases to be
any contractual payments to the entity. For cash flow probable, an entity would be able to conclude that
hedges, if it becomes probable that a counterparty certain hedging relationships, such as cash flow
will default by failing to make any contractual hedges, are expected to be highly effective in
payments to the entity, then the entity would be achieving offsetting changes in fair values or cash
unable to conclude that the hedging relationship will flows. [815-20-25-77, 25-122]
be highly effective. [IAS 39.AG107, IGF.5.2]

Discontinuing hedge accounting

IFRS US

Hedge accounting is discontinued prospectively if: Like IFRS, hedge accounting is discontinued
prospectively if:
• the hedged transaction is no longer
highly probable; • the hedged transaction is no longer
probable;
• the hedging instrument expires or is
sold, terminated or exercised; • the hedging instrument expires or is
sold, terminated or exercised;
• the hedged item is sold, settled or
otherwise disposed of; • the hedged item is sold, settled or
otherwise disposed of;
• the hedge is no longer highly
effective; or • the hedge is no longer highly
effective; or
• the entity revokes the designation.
[IAS 39.91, 101, AG113, IGF.6.2(i)] • the entity revokes the designation
(dedesignates). [815-25-40-1 - 40-
6, 815-30-40-1 - 40-7]

At the date on which hedge accounting is Like IFRS, at the date on which hedge accounting is
discontinued, it is necessary to determine hedge discontinued, it is necessary to determine hedge
effectiveness and to recognise any ineffectiveness in effectiveness and to recognise any ineffectiveness in
profit or loss. [IAS 39.AG113] profit or loss. [815-25-40-3, 815-30-40-2]

The hedging instrument and the hedged item are The hedging instrument and the hedged item are

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 7. Financial instruments (IFRS compared to US GAAP)

subsequently accounted for according to the normal subsequently accounted for according to the normal
requirements of IFRS. [IAS 39.92] requirements of US GAAP, which may differ from the
requirements of IFRS.

The treatment of the cumulative gain or loss The treatment of the cumulative gain or loss
previously recognised in OCI in respect of a cash previously recognised in OCI in respect of a cash
flow hedge depends on whether the hedged flow hedge depends on whether the hedged
transaction is still expected to occur. transaction is probable of not occurring at the
originally forecast date or within two months
• If the transaction is no longer thereafter.
expected to occur, then the amount
previously recognised in OCI is • Gains and losses remain in
reclassified to profit or loss accumulated OCI unless it is
immediately. probable that the forecast
transaction will not occur by the end
• If the hedged transaction is still of the originally specified time period
expected to occur, then the amount or within a two-month period
deferred in OCI remains there until thereafter, unlike IFRS.
the forecast transaction impacts
profit or loss. [IAS 39.101] • If a forecast transaction will occur in
the period noted above, then the
amount deferred in accumulated OCI
remains there until the forecast
transaction impacts profit or loss,
like IFRS. However, there still exists
the potential difference between
'expected to occur' for IFRS and
'probable of not occurring on the
originally forecasted date or within
two months thereafter' for US GAAP.
[815-30-35-38 - 35-41, 40-4]

For a hedge of a net investment in a foreign Like IFRS, for a hedge of a net investment in a
operation, the cumulative amount previously foreign operation, the cumulative amount recognised
recognised in OCI remains in OCI until the in accumulated OCI remains in accumulated OCI
investment is disposed of. [IAS 39.102] until the investment is disposed of or an impairment
loss is recognised. [830-40]

Hedging on a group basis

Internal derivatives

IFRS US

An entity may use internal derivatives to transfer risk Unlike IFRS, a foreign currency derivative instrument
from individual operations within the group to a that has been entered into with another member of
centralised treasury. Derivatives between entities a consolidated group can be a hedging instrument in
within the same reporting group can also be used to the consolidated financial statements if that other
control and monitor risks through the central member has entered into an offsetting contract with
treasury function in order to benefit from pricing an unrelated third party and certain other criteria
advantages and to offset equal and opposite are met. [815-20-25-52 - 52-56]
exposures arising from different parts of the group.

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 7. Financial instruments (IFRS compared to US GAAP)

However, all such internal derivatives eliminate on

consolidation and therefore are not eligible for
hedge accounting in the consolidated financial
statements, even if at a group level the overall net
position is hedged externally. Therefore, only
derivatives involving external third parties can be
designated as hedging instruments in consolidated
financial statements. However, it is possible for the
centralised treasury to enter into one or more
derivatives with external counterparties to offset the
internal derivatives. Such external derivatives may
qualify as hedging instruments in the consolidated
financial statements provided that they are legally
separate contracts and serve a valid business
purpose - e.g. laying off risk exposures on a gross
basis. In our view, a relationship should exist
between the internal transactions and one or
multiple related external transactions and this
relationship should be documented at inception of
the hedging relationship. [IAS 39.73, IGF.1.4]

Intra-group balances or transactions as the hedged item

IFRS US

The foreign currency risk on recognised intra-group Unlike IFRS, a hedge of the currency risk on a
monetary items qualifies for hedge accounting in the forecast intra-group transaction qualifies for hedge
consolidated financial statements if it results in an accounting provided that:
exposure that is not fully eliminated on consolidation.
[IAS 39.80] • either (1) the operating unit that has
the foreign currency exposure is a
The foreign currency risk of a highly probable party to the hedging instrument; or
forecast intra-group transaction may qualify as the (2) another member of the
hedged item in the consolidated financial statements consolidated group that has the
provided that the transaction is denominated in a same functional currency as that
currency other than the currency of the entity operating unit is a party to the
entering into the transaction and the foreign hedging instrument and there is no
currency risk will affect consolidated profit or loss. intervening subsidiary with a
[IAS 39.80, AG99A] different functional currency;
• the hedge transaction is
denominated in a currency other
than the hedging unit's functional
currency; and
• the other cash flow hedge criteria
are met, including that the
transaction will affect consolidated
profit or loss. [815-20-25-30]

Forthcoming requirements

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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

Amendments on discontinuing hedge accounting are There are no forthcoming changes to the
effective for annual periods beginning on or after 1 requirements under US GAAP.
January 2014.

The amendments provide relief from discontinuing Existing SEC Staff interpretations of US GAAP
hedge accounting if the following criteria are met: provide relief from discontinuing hedge accounting in
more situations than those provided under the
• as a consequence of laws or forthcoming IFRS amendments. However, the
regulations or the introduction of forthcoming changes to IFRS bring IFRS and US
laws and regulations, a clearing accounting closer together.
counterparty becomes a new
counterparty to each of the original
parties; and
• any changes to a derivative's terms
are limited to those necessary to
replace the counterparty - e.g.
changes to collateral terms.

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 7. Financial instruments (IFRS compared to US GAAP)

7.8 Presentation and disclosure

IFRS US

(IFRS 7, IFRS 13, IAS 1, IAS 32) (ASC Topic 815, ASC Topic 860, ASC Subtopic 320-
10, ASC Subtopic 405-20, ASC Subtopic 460-10,
ASC Subtopic 470-20, ASC Subtopic 480-10, ASC
Subtopic 505-10, ASC Subtopic 825-10, Reg S-K,
Reg S-X, SAB Topic 4-E, ASC paragraph 310-10-
S99-2)

Overview

IFRS US

• A financial asset and a financial • Like IFRS, a financial asset and a

liability are offset only if there are financial liability may be offset only if
both a legally enforceable right to there are both a legally enforceable
offset and an intention to settle net right to offset and an intention to
or to settle both amounts settle net or to settle both amounts
simultaneously. simultaneously. However, unlike
IFRS, derivatives with the same
counterparty, and related collateral,
may be offset, provided that they
are subject to a master netting
arrangement and certain criteria are
met. Also, unlike IFRS, repurchase
agreements and reverse repurchase
agreements that clear through a
qualified clearing house may be
offset, provided that they are subject
to a master netting arrangement
and certain criteria are met. Once
the applicable criteria are met,
offsetting is a policy choice, unlike
IFRS.

• Disclosure is required in respect of • Like IFRS, disclosures are required

the significance of financial to enable users to evaluate the
instruments for the entity's financial significance of financial instruments
position and performance, and the for the entity's financial position and
nature and extent of risk arising performance, and the extent of risk
from financial instruments and how arising from financial instruments.
the entity manages those risks.

• For disclosure of the significance of • Like IFRS, the overriding principle is

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 7. Financial instruments (IFRS compared to US GAAP)

financial instruments, the overriding to disclose sufficient information to

principle is to disclose sufficient enable users of financial statements
information to enable users of to evaluate the significance of
financial statements to evaluate the financial instruments for an entity's
significance of financial instruments financial position and performance.
for an entity's financial position and However, the specific requirements
performance. differ from IFRS.

• Risk disclosures require both • Risk disclosure requirements differ

qualitative and quantitative for public and non-public entities
information. under US GAAP. Public entities are
required to disclose qualitative and
quantitative information; however,
the specific disclosure requirements
differ from IFRS. The disclosure
requirements for non-public entities
are primarily qualitative and much
less detailed than for public entities
under US GAAP or under IFRS.

• Qualitative disclosures describe • Unlike IFRS, US GAAP does not

management's objectives, policies require specific qualitative
and processes for managing risks disclosures in respect of financial
arising from financial instruments. instruments other than related to
significant concentrations of credit
risk. Instead, qualitative disclosures
about market risk, interest rate risk,
foreign currency risk, commodity
price risk and other relevant price
risk are required to be disclosed by
SEC registrants outside the financial
statements in the management
discussion and analysis (MD&A).

• Quantitative data about the exposure • Unlike IFRS, non-SEC registrants are
to risks arising from financial not required to make specific
instruments is based on information quantitative risk-related disclosures
provided internally to key in respect of financial instruments,
management. However, certain other than related to concentrations
disclosures about the entity's of credit risk. The SEC does require
exposures to credit risk, liquidity risk certain quantitative disclosures;
and market risk arising from however, unlike IFRS, these
financial instruments are required, disclosures are limited to market risk
irrespective of whether this disclosures and are provided outside
information is provided to the financial statements in the
management. MD&A.

• The presentation and disclosure • The presentation and disclosures

requirements discussed in this requirements discussed in this
chapter are not exhaustive, and are chapter are not exhaustive, and are
intended to provide an overview intended to provide an overview
only. only. In addition, even though a
general area of presentation or
disclosure under US GAAP may be
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 7. Financial instruments (IFRS compared to US GAAP)

like IFRS, differences may arise in

the detailed requirements that are
not discussed in this publication.

Presentation

Statement of financial position

IFRS US

At a minimum, financial assets are presented in the Unlike IFRS, US GAAP does not require separate
statement of financial position, with separate presentation of specific financial assets; however,
presentation of cash and cash equivalents, trade and practice is similar to IFRS. Additionally, separate
other receivables, and investments accounted for presentation on the face of the statement of financial
under the equity method. [IAS 1.54] position is required by SEC registrants for cash and
cash equivalents and accounts and notes receivable,
like IFRS; and for marketable securities, unlike IFRS.
[210-10-S99]

Financial liabilities are presented in the statement of Financial liabilities are presented in the statement of
financial position, with separate presentation of financial position, with SEC registrants required to
trade and other payables. [IAS 1.54] present separately trade payables and notes payable
and other payables. [210-10-S99]

Additional line items may also be presented. [IAS Like IFRS, additional line items may also be
1.55] presented. Unlike IFRS, additional line items are also
required for SEC registrants. [210-10-S99]

Transaction costs of a liability that is not measured Unlike IFRS, transaction costs of a liability that is not
at fair value through profit or loss are deducted from measured at fair value through profit or loss are
the carrying amount of the financial liability and are recognised as a separate deferred asset. [835-30-
not recognised as separate assets. [IAS 39.43] 45-3]

Refinancings and debt covenant waivers completed Unlike IFRS, entities may classify debt due within 12
after the reporting date would not result in non- months as non-current at the reporting date as a
current classification of debt, even if they are result of refinancing or debt covenant waivers
executed before the financial statements are achieved after the reporting date, provided that they
authorised for issue. [IAS 1.74] are completed before the financial statements are
issued or available to be issued. [470-10-45]

IFRS does not provide specific guidance on the Like IFRS, US GAAP does not provide specific
statement of financial position presentation of non- guidance on the statement of financial position
derivative or derivative hedging instruments, and presentation of non-derivative or derivative hedging
practice varies over whether they are presented instruments, and practice varies over whether they
together with the item to which they relate, or are presented together with the item to which they
separately. Derivatives not held primarily for trading relate or separately. Derivatives are classified as
purposes are classified as current or non-current current or non-current based on their outstanding
based on their outstanding maturities. However, maturities and management's intended holding of
entities are required to comply with the the derivative, like IFRS. Like IFRS, entities are

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 7. Financial instruments (IFRS compared to US GAAP)

requirements for offsetting (see below). required to comply with the requirements for
offsetting (see below).

Statement of profit or loss and OCI (Statement of comprehensive income)

IFRS US

There is no specific guidance on presentation of Unlike IFRS, some guidance is provided on the
gains or losses on financial instruments in the statement of comprehensive income presentation of
statement of profit or loss and OCI. In our view, gains and losses on financial instruments, but these
gains and losses on financial instruments should be requirements apply only to SEC registrants. Unlike
reported in the most appropriate line item according IFRS, for hedging instruments the effective portion
to their nature. If an entity uses derivatives as of the gain or loss is required to be presented in the
hedging instruments for accounting purposes, or same statement of comprehensive income line item
applies the fair value option to a non-derivative as as the hedged item. For derivatives that are not
an alternative to hedge accounting (see chapter designated as hedging instruments, split
7.4), then in our view gains or losses on both the presentation of the unrealised and realised portions
non-derivative, being the item that is economically is prohibited for SEC registrants and they have to be
hedged or subject to hedge accounting, and the presented on the same line item, unlike IFRS.
derivative may be split for presentation purposes in Otherwise, like IFRS, there is no other specific
order to best reflect the impact on profit or loss of guidance on presentation of gains or losses on
the economics of the relationship. financial instruments in the statement of
comprehensive income, and practice varies. [225-
10-S99]

Offsetting

IFRS US

Financial assets and financial liabilities are offset and Under US GAAP, a financial asset and a financial
the net amount reported in the statement of financial liability may be offset only if a right of setoff exists. A
position only if both of the following conditions are 'right of setoff' is a debtor's legal right, by contract
met: or otherwise, to discharge all or a portion of the
debt owed to another party by applying against the
• the entity currently has a legally debt an amount that the other party owes to the
enforceable right to set off the debtor. A right of setoff exists if all of the following
recognised amounts; and conditions are met:
• the entity has the intention to settle • each of two parties owes the other
on a net basis or to realise the asset determinable amounts, unlike IFRS;
and settle the liability
simultaneously. [IAS 32.42, 45] • the reporting entity has the right to
offset the amount owed with the
amount owed by the other party,
unlike IFRS;

the reporting entity intends to offset, like IFRS; and

• the right to offset is enforceable at
law, like IFRS. [210-20-20, 210-20-

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 7. Financial instruments (IFRS compared to US GAAP)

45]

Once these criteria are met, offsetting is required. Once these criteria are met, offsetting is a policy
[IAS 32.42] decision, unlike IFRS. [210-20-45]

Individual instruments that, when viewed together, Like IFRS, individual instruments that, when viewed
form a synthetic instrument are not usually offset together, form a synthetic instrument do not usually
unless the offsetting conditions above are met. [IAS qualify for offsetting unless the offsetting conditions
32.49(a)] above are met. [815-10-25-4]

If a transfer of financial assets does not qualify for Like IFRS, if a transfer of financial assets does not
derecognition (see chapter 7.5), then the associated qualify for derecognition (see chapter 7.5), then the
liability and the corresponding assets are not offset. associated liability and the corresponding assets are
[IAS 32.42] not offset. [860-30-25]

Derivative assets and liabilities are usually presented Unlike IFRS, US GAAP allows derivatives and fair
on a gross basis as separate line items in the value amounts recognised for the right to receive or
statement of financial position because they do not return cash collateral arising from derivative
generally meet the offsetting criteria. This is transactions subject to a master netting
because they are usually entered into with different arrangement with the same counterparty to be
counterparties and therefore there is no right to set offset even though there may be no intention to
off the recognised amounts. If they are entered into settle on a net basis, provided that certain criteria
with the same counterparty, then the entity may not are met. Once these criteria are met, offsetting is an
have the intent to settle on a net basis or to realise accounting policy election. [815-10-45-5 - 45-6]
the asset and the liability simultaneously. [IAS
32.42]

A lessor is prohibited from presenting its lease Unlike IFRS, if the criteria are met for a lease to be
receivable along with its related financing on a net classified as a leveraged lease, then a lessor would
basis. [IAS 32.42] present only a net investment in the lease (see
chapter 5.1). [840-30-30-14]

Repurchase agreements and reverse repurchase Unlike IFRS, US GAAP allows repurchase
agreements are generally presented on a gross agreements and reverse repurchase agreements
basis in the statement of financial position because subject to a master netting arrangement that clear
they do not usually meet the offsetting criteria - i.e. through a qualified clearing house to be offset even
they are not intended to be settled on a net basis or though there may be no intention to settle on a net
simultaneously. [IAS 32.42] basis, provided that certain criteria are met. Once
the criteria are met, offsetting is an accounting
policy election. [210-20-45-11 - 45-17]

Minimum quantitative and qualitative disclosures are Like IFRS, the disclosures include minimum
required for financial assets and financial liabilities quantitative and qualitative information about
that are: financial assets and financial liabilities that are:
(1) offset in the statement of financial (1) offset in the statement of financial
position; or position; or
(2) subject to an enforceable master (2) subject to enforceable master
netting agreement or similar netting agreements or similar
arrangement that covers similar arrangements, irrespective of
financial instruments and whether they are offset in the
transactions, irrespective of whether statement of financial position. [210-

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 7. Financial instruments (IFRS compared to US GAAP)

they are offset in the statement of 20-50]

financial position. [IFRS 7.13A-13B,
B40] Unlike IFRS, US GAAP specifically identifies financial
instruments that are subject to the offsetting
'Similar financial instruments and transactions' disclosures, as follows: derivatives, sales and
include derivatives, sales and repurchase repurchase agreements and securities borrowing
agreements, and securities borrowing and lending and lending agreements.
agreements. Financial instruments that are outside
of the scope of the disclosure requirements (in (2)
above) include loans and customer deposits at the
same institution, and instruments subject only to a
collateral agreement. [IFRS 7.B41]

The significance of financial instruments

Financial assets or financial liabilities at fair value through profit or loss

IFRS US

Disclosures required for loans and receivables and Disclosures required for financial assets and
financial liabilities that an entity has elected to liabilities that an entity has elected to measure at
measure at fair value through profit or loss include fair value through profit or loss include the reasons
the nature of instruments and how the entity has for making such election, and the reasons why such
satisfied the conditions for such election. For loans an election was made for only some eligible items
and receivables designated at fair value through within a group but not others, which is more specific
profit or loss, an entity discloses the maximum than IFRS. US GAAP has disclosure requirements on
exposure to credit risk and the amount by which this credit risk exposure for loans and other receivables,
risk is mitigated by credit derivatives or similar which are similar to but not exactly the same as
instruments, the change in the fair value of the loan IFRS. [825-10-50-28(a), 50-28(b)]
or receivable attributable to credit risk (cumulatively
and for the period), and from the date of designation
the change in the fair value of any related credit
derivatives or similar instruments (cumulatively and
for the period). [IFRS 7.9, B5]

For financial liabilities designated at fair value Like IFRS, US GAAP requires that for financial
through profit or loss, an entity discloses the change liabilities designated at fair value through profit or
in the fair value of the financial liability that is loss, an entity discloses the change in the fair value
attributable to changes in credit risk (cumulatively of the financial liability attributable to changes in
and for the period) and the difference between the credit risk (cumulatively and for the period). Unlike
carrying amount of the financial liability and the IFRS, US GAAP requires an entity to disclose the
amount that the entity is contractually required to difference between the carrying amount and the
pay at maturity. [IFRS 7.10] amount that the entity is contractually required to
pay at maturity only in respect of a long-term debt.
Moreover, unlike IFRS, this disclosure also pertains
to long-term debt that is measured at amortised
cost. [825-10-50-28(d), 50-30(d)]

Hedge accounting

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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

Separate qualitative and quantitative information is Like IFRS, the required quantitative and qualitative
disclosed for fair value hedges, cash flow hedges disclosures in respect of hedging distinguish
and hedges of a net investment in a foreign between fair value hedging instruments, cash flow
operation, including: hedging instruments and hedging instruments for a
net investment in a foreign operation. However,
• a description of each type of hedge; unlike IFRS, some of the disclosure requirements
• a description of the financial also apply to derivatives not designated as hedging
instruments designated as hedging instruments. The disclosures for derivatives
instruments for the hedge and their designated as hedging instruments include the
fair values at the reporting date; and objectives for holding the derivative, the context
needed to understand those objectives, the risk
• the nature of the risks being hedged. management strategies for achieving those
[IFRS 7.22] objectives and a description of the items or
transactions that are being hedged. The
requirements are similar to IFRS, although the
precise language under US GAAP differs from IFRS.
[815-10-50-1A, 50-2]

Additional disclosures are required in respect of cash Additional disclosures are required in respect of cash
flow hedges. [IFRS 7.23] flow hedges, although they are not identical to those
under IFRS. [815-30-50]

Unlike IFRS, US GAAP requires further detailed

qualitative and quantitative disclosures to provide an
understanding of how and why an entity uses
derivatives, how derivatives and related hedged
items are accounted for, and how derivatives and
related hedged items affect an entity's financial
position, financial performance and cash flows.
[815-10-50-1]

Fair values

IFRS US

For each class of financial asset and financial Like IFRS, for each class of financial asset and
liability, an entity discloses the fair value in a manner liability, an entity discloses the fair value in a manner
that allows for it to be compared with its carrying that allows for it to be compared with its carrying
amount. Such a disclosure is not required: amount. However, US GAAP provides detailed
guidance on defining major categories of debt and
• if the carrying amount is a equity securities, and therefore differences from
reasonable approximation of the fair IFRS may arise in practice. Fair value disclosures
value; are not required for a non-public entity that meets
• for an investment in equity certain size limitations and has no derivatives. [825-
instruments that do not have a 10-50-11]
quoted market price in an active
market and for derivatives linked to
such equity instruments that are

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 7. Financial instruments (IFRS compared to US GAAP)

measured at cost because their fair

value cannot be determined reliably;
and
• for a contract containing a
discretionary participation feature if
the fair value of the feature cannot
be reliably measured. [IFRS 7.25,
29]

The fair value measurement standard provides The fair value measurement codification topic
guidance on fair value measurement and the related provides guidance on fair value measurement and
disclosure requirements (see chapter 2.4). the related disclosure requirements (see chapter
2.4).

Nature and extent of risks arising from financial instruments

Qualitative risk disclosures

IFRS US

Qualitative disclosures are required in respect of Unlike IFRS, US GAAP does not require specific
each type of risk arising from financial instruments: qualitative disclosures in respect of financial
instruments other than related to significant
• exposure to the risk and how it concentrations of credit risk. However, qualitative
arises; disclosures about market risk (interest rate risk,
• the entity's objectives, policies and foreign currency risk, commodity price risk and other
process for managing the risk; and relevant price risk - e.g. equity price risk) are
required to be disclosed by SEC registrants outside
• the methods used to measure the the financial statements (e.g. in the management
risk. [IFRS 7.33] discussion and analysis (MD&A)). [235-10-S99, 825-
10-50-20 - 50-22]

Quantitative risk disclosures

IFRS US

Quantitative disclosures are required for each type Unlike IFRS, non-SEC registrants are not required to
of risk arising from financial instruments, as follows: make specific quantitative risk-related disclosures in
respect of financial instruments, other than related
• summary quantitative data based on to concentrations of credit risk. Like IFRS, SEC
the information provided internally to registrants are required to make certain quantitative
key management personnel; disclosures; however, unlike IFRS, those disclosures
• additional information specifically are limited to market risk disclosures and are
required by the standard; and provided outside the financial statements (e.g. in the
MD&A). [235-10-S99, 825-10-50-20 - 50-22]
• information on concentration of risk,
if this is not apparent from the
above disclosures. [IFRS 7.34]

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 7. Financial instruments (IFRS compared to US GAAP)

Concentrations of risk should be disclosed. Unlike IFRS, concentration disclosures in US GAAP

Concentrations of risk arise from financial are required only in the context of credit risk. In
instruments that have similar characteristics and are addition, US GAAP and IFRS differ in the level of
affected in a similar manner when there are detail of the disclosure requirements for
changes in economic or other conditions. Identifying concentration of credit risk. For US GAAP, for each
concentrations of risk is a matter of judgement and significant credit concentration an entity's disclosures
therefore an entity discloses: should include:
• a description of how management • the nature and characteristic of the
determines concentrations; credit concentration;
• a description of the shared • the maximum credit exposure;
characteristics that identify each
concentration - e.g. counterparty, • collateral information, including the
geographical area, currency or entity's policy on requiring collateral;
market; and and

• the amount of the risk exposure • information about the entity's master
associated with financial instruments netting arrangements, including the
sharing that characteristic. [IFRS entity's policy on entering into
7.34(c), B8] master netting arrangements. [825-
10-50-21]

Credit risk

IFRS US

In respect of credit risk, an entity discloses Like IFRS, US GAAP requires disclosure regarding
quantitative data, including information about the: maximum credit exposure, collateral held, assets
that are past due and impaired. However, the exact
• amount that best represents its situations requiring such disclosure and the exact
maximum exposure to credit risk, disclosures themselves differ from IFRS. In addition,
unless the carrying amount already US GAAP has credit risk disclosures that are specific
reflects such exposure; to the type of financial asset. For example, US GAAP
• description of collateral held as requires disclosure of information that enables
security and other credit financial statement users to understand the types of
enhancements and their financial available-for-sale and held-to-maturity debt and
effect in respect of the amount that equity securities held, including information about
best represents the maximum investments in an unrealised loss position for which
exposure to credit risk; an other-than-temporary impairment has or has not
been recognised. Also, US GAAP requires disclosure
• credit quality of financial assets that of information that enables financial statement users
are neither past due nor impaired; to understand why a portion of an other-than-
temporary impairment of a debt security was not
• financial assets that are either past
recognised in profit or loss and the methodology and
due or impaired; and
significant inputs used to calculate the portion of the
• collateral and other credit total other-than-temporary impairment that was
enhancements obtained during the recognised in profit or loss, unlike IFRS. [320-10-50-
period that meet the recognition 2, 50-5 - 50-6, 825-10-50-21]
criteria in IFRS. [IFRS 7.36-38, B9,
B10(c)]

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 7. Financial instruments (IFRS compared to US GAAP)

Liquidity risk

IFRS US

In respect of liquidity risk, an entity discloses Unlike IFRS, maturity disclosures in the financial
quantitative data, including: statements are not required for financial liabilities,
other than the current and non-current distinction
• a maturity analysis for non- (see chapter 3.1) and the requirement to disclose
derivative financial liabilities, amounts to be paid in each of the next five years
including issued financial guarantee and in the aggregate thereafter. If the tabular
contracts, showing their remaining format is used by SEC registrants in their MD&A
contractual maturities; market risk disclosures, then a maturity analysis is
• a maturity analysis for derivative required to be included. Like IFRS, an entity
financial liabilities, including the discloses a maturity analysis of financial assets if
remaining contractual maturities for such information is necessary to evaluate the extent
those derivative financial liabilities and nature of liquidity risk. However, US GAAP
for which contractual maturities are contains specific guidance requiring maturity
essential for an understanding of the disclosures of debt securities based on appropriate
timing of the cash flows; and groupings of each of held-to-maturity and available-
for-sale securities. Furthermore, SEC registrant
• information about how liquidity risk banks are required to provide a maturity analysis of
is managed. their loan portfolio in the MD&A. [320-10-50-3, 50-5,
470-10 50-1, 825-10-50-23(c)]
An entity discloses a maturity analysis of financial
assets held to manage liquidity risk if such
information is necessary to evaluate the extent and
nature of liquidity risk. [IFRS 7.39, B11]

Market risk

IFRS US

IFRS does not mandate the form of the disclosures Like IFRS, US GAAP does not mandate the form of
about market risk. However, an entity presents a disclosures. However, market risk disclosures
sensitivity analysis for each type of market risk: provided in the MD&A by SEC registrants are
currency risk, interest rate risk and other price risk required to be in one of three forms: tabular,
that it is exposed to as at the reporting date. [IFRS sensitivity analysis or value-at-risk. An entity is not
7.40, B18-B19] required to use the same format for each risk. In all
cases, the inherent limitations of the disclosure are
explained. Like IFRS, separate quantitative
information is presented for each market risk
exposure category - i.e. interest rate risk, foreign
currency risk, commodity price risk and other
relevant market risks, such as equity price risk.

Transfers of financial assets

IFRS US

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 7. Financial instruments (IFRS compared to US GAAP)

An entity discloses information on: As described in chapter 7.5, unlike IFRS, continuing
involvement is not an explicit consideration when
• transferred financial assets that are testing a transfer for derecognition, but rather
not derecognised in their entirety; derecognition is based on whether legal, actual and
and effective control have been surrendered. As a result,
• transferred financial assets that are differences in disclosures may arise. The principal
derecognised in their entirety and in objectives of the disclosure requirements in US
which the entity retains continuing GAAP are to provide an understanding of:
involvement. [IFRS 7.42A] • a transferor's ongoing involvement,
Examples of disclosures that are required for each if any, with transferred financial
class of transferred financial assets that are not assets;
derecognised in their entirety include: • the nature of any restrictions on
• the nature of the transferred assets; assets reported by an entity in its
statement of financial position that
• the nature of the risk and rewards relate to a transferred financial
associated with those assets to asset, including carrying amounts of
which the entity is exposed; and those assets;
• the nature of the relationship • how servicing assets and liabilities
between the transferred assets and are reported; and
the associated liabilities and the
restrictions on the entity's use of • how the transfer affects the
those assets. [IFRS 7.42D] transferor's financial position,
financial performance and cash
flows when transfers are either
accounted for as secured
borrowings or as sales when the
transferor has some form of ongoing
involvement. [860-10-50-3]

Examples of disclosures that are required for each

type of continuing involvement in transferred
financial assets that are derecognised in their
entirety include:
• the carrying amounts and fair values
of the assets and liabilities
representing the entity's continuing
involvement;
• the entity's maximum exposure to
loss from its continuing involvement;
• a maturity analysis of the
undiscounted cash flows that may be
payable to the transferee in respect
of those assets; and
• the gain or loss on transfer and
income and expense arising from
the entity's continuing involvement.
[IFRS 7.42E, G]

Forthcoming requirements
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 7. Financial instruments (IFRS compared to US GAAP)

IFRS US

A number of forthcoming requirements will affect There are no forthcoming changes to the
the requirements highlighted in this chapter in future requirements under US GAAP.
reporting periods.
• Amendments to the offsetting
requirements are effective for
annual periods beginning on or after
1 January 2014.
• Consequential amendments have
been made as a result of the new
standard on financial instruments, to
reflect the changes in categories and
certain enhancements. See chapter
7A for a discussion of the new
standard; the consequential
amendments are not highlighted in
this chapter.

Offsetting

IFRS US

Amendments clarify that: US GAAP contains a lot of detail on the criteria for
offsetting, and therefore differences from IFRS are
• an entity currently has a legally likely, notwithstanding the IFRS amendments. A
enforceable right of set off if the financial asset and a financial liability may be offset
right is: only if a right of setoff exists. A 'right of setoff' is a
- not contingent on a future event; debtor's legal right, by contract or otherwise, to
and discharge all or a portion of the debt owed to
another party by applying against the debt an
- enforceable both in the normal amount that the other party owes to the debtor. A
course of business and in the right of setoff exists if all of the following conditions
event of default, insolvency or are met:
bankruptcy of the entity and all
of the counterparties; and • each of two parties owes the other
determinable amounts;
• a gross settlement system is
equivalent to net settlement if it has • the reporting entity has the right to
features that: offset the amount owed with the
amount owed by the other party;
• - eliminate or result in insignificant
credit and liquidity risk; and the reporting entity intends to offset; and

- process receivables and • the right to offset is enforceable at

payables in a single settlement law. [210-20-20, 210-20-45]
process or cycle. [IAS 32.AG38B,
AG38F, BC78, BC82-BC84]

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 7. Financial instruments (IFRS compared to US GAAP)

7A Financial instruments - Classification and measurement

IFRS US

(IFRS 9) (ASC Topic 310, ASC Topic 815, ASC Topic 830,
ASC Topic 942, ASC Subtopic 320-10, ASC Subtopic
470-50, ASC Subtopic 825-10, ASC Subtopic 948-10,
SAB Topic 5-M, ASC paragraph 320-10-S99-1, SAB
Topic 6-L, ASC paragraph 310-10-S99-4)

Overview

IFRS US

• The new standard on financial • The FASB has a comprehensive

instruments does not currently deal project on financial instruments
with the impairment of financial under way and issued an exposure
assets and hedge accounting. The draft in 2010. Because no final
standard is effective for annual Accounting Standards Update has
periods beginning on or after 1 yet been issued, the comparison in
January 2015; early application is this chapter is based on current US
permitted. However, the IASB has GAAP.
tentatively decided to postpone the
effective date at the date of this
publication being issued.

• There are two primary • Like IFRS, financial assets are

measurement categories for measured at amortised cost or fair
financial assets: amortised cost and value. However, there are
fair value. The previous categories differences over which assets are
of held-to-maturity, loans and measured at amortised cost and
receivables and available-for-sale which are measured at fair value.
are eliminated, as are the existing Unlike IFRS, there are tainting
tainting provisions for disposals provisions for disposals of securities
before maturity of certain financial that are classified as held-to-
assets. maturity.

• A financial asset is measured at • Unlike IFRS, a financial asset is

amortised cost if both of the measured at amortised cost if it is a
following conditions are met: held-to-maturity security or a loan
other than loans held-for-sale.
- the asset is held within a
business model whose objective
is to hold assets in order to
collect contractual cash flows;
and

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 7. Financial instruments (IFRS compared to US GAAP)

- the contractual terms of the

financial asset give rise, on
specified dates, to cash flows
that are solely payments of
principal and interest.

• All other financial assets are • Marketable equity securities are

measured at fair value. measured at fair value. Debt
securities are measured at fair value
unless they are classified as held-to-
maturity. Unlike IFRS, investments in
equity securities that are not readily
marketable are measured at cost
unless fair value option is elected.
Unlike IFRS, loans held-for-sale are
measured at the lower of cost and
fair value.

• Entities have an option to classify • Like IFRS, entities have the option to
financial assets that meet the classify financial assets that would
amortised cost criteria as at fair otherwise be accounted for at
value through profit or loss if doing amortised cost as at fair value
so eliminates or significantly reduces through profit or loss. However, this
an accounting mismatch. is a free election and there is no
requirement that doing so reduces
an accounting mismatch, unlike
IFRS.

• Embedded derivatives with host • Unlike IFRS, derivatives embedded

contracts that are financial assets in in hybrid instruments are evaluated
the scope of the standard are not to determine whether they are
separated; instead, the hybrid bifurcated and accounted for
financial instrument is assessed as a separately, unless the fair value
whole for classification. Hybrid through profit or loss election is
instruments with host contracts that made for a hybrid instrument.
are not financial assets in the scope
of the standard are assessed to
determine whether the embedded
derivative(s) is required to be
separated from the host contract.

• If a financial asset is measured at • If a financial asset is measured at

fair value, then all changes in fair fair value, then all changes in fair
value are generally recognised in value are recognised in profit or loss
profit or loss. For investments in if it is classified as a trading security
equity instruments that are not held or the fair value option has been
for trading, an entity has the elected, which may differ from the
irrevocable option, on an outcome under IFRS. For debt and
instrument-by-instrument basis, to marketable equity securities that are
recognise gains and losses in OCI, classified as available-for-sale,
with no reclassification of gains and changes in fair value are recognised
losses into profit or loss and no in OCI. Unlike IFRS, amounts
impairments recognised in profit or recognised in OCI are reclassified to

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 7. Financial instruments (IFRS compared to US GAAP)

loss. If an equity investment is so profit or loss when the security is

designated, then dividend income is sold. Unlike IFRS, securities
generally recognised in profit or classified as available-for-sale are
loss. subject to impairment analysis, with
impairment losses generally being
recognised in profit or loss when
there is an other-than-temporary
impairment.

• There is no exemption allowing • Unlike IFRS, non-marketable equity

unquoted equity investments and securities are measured at cost
related derivatives to be measured unless the fair value through profit
at cost. However, there is guidance or loss election is made.
on the limited circumstances in
which the cost of such an instrument
may be an appropriate
approximation of fair value.

• The classification requirements for • The classification requirements

financial liabilities are similar to under US GAAP for financial
those in the currently effective liabilities are similar to those under
standard. IFRS, although there are
differences.

• Entities have an irrevocable option to • Like IFRS, entities have an

classify financial liabilities that meet irrevocable option to classify a
the amortised cost criteria as at fair financial liability as at fair value
value through profit or loss. through profit or loss but, unlike
However, a split presentation of IFRS, there are no conditions
changes in the fair value of financial imposed on such election. Also,
liabilities designated as at fair value unlike IFRS, all changes in the fair
through profit or loss is generally value of financial liabilities
required. The portion of the fair designated as at fair value through
value changes that is attributable to profit or loss are recognised in profit
changes in the financial liability's or loss.
credit risk is recognised in OCI. The
remainder is recognised in profit or
loss. The amount presented in OCI
is never reclassified to profit or loss.

• The classification of a financial asset • Like IFRS, the classification of an

or financial liability is determined on asset is determined on initial
initial recognition. Reclassifications recognition. Unlike IFRS,
of financial assets are made only on reclassifications are made from the
a change in an entity's business held-to-maturity category to the
model that is significant to its available-for-sale category on a
operations. These are expected to tainting event. Reclassifications are
be very infrequent. No other made out of the loans held-for-sale
reclassifications are permitted. category to the loans and
receivables category when the
holder has the intention and ability
to hold the loan for the foreseeable
future or until maturity, unlike IFRS.
Unlike IFRS, reclassifications to or
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 7. Financial instruments (IFRS compared to US GAAP)

from the trading category are

permitted but rare.

• The accounting requirements • An Accounting Standards Update on

discussed in this chapter are from financial instruments has not been
the first chapters of a forthcoming issued and therefore this
standard on financial instruments. comparison is based on current US
These chapters - which deal with GAAP.
the classification, measurement,
recognition and derecognition of
financial assets and financial
liabilities - are effective for annual
periods beginning on or after 1
January 2015; early application is
permitted. However, the IASB has
tentatively decided to postpone the
effective date at the date of this
publication being issued. Entities that
adopt the standard early are
required to apply all of the
consequential amendments to other
standards at the same time.
The guidance in the current financial instruments
standards on impairment of financial assets (see
chapter 7.6) and hedge accounting (see chapter 7.7)
continues to apply.
The new requirements, highlighted below, generally
apply retrospectively.

Scope

IFRS US

All items in the scope of IAS 39 Financial Unlike IFRS, financial instruments continue to have
Instruments: Recognition and Measurement (see the accounting described in chapter 7.1.
chapter 7.1) are accounted for using the guidance in
the amended financial instruments standard as
outlined below. [IFRS 9.2.1]

Classification of financial assets

IFRS US

On initial recognition, a financial asset is classified Unlike IFRS, the classification of financial assets is
into one of two primary measurement categories: not generally prescribed other than for investments
in debt and marketable equity securities, which are
• amortised cost; or classified as:

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 7. Financial instruments (IFRS compared to US GAAP)

• fair value. [IFRS [Link]] • trading;

• held-to-maturity; or
• available-for-sale. [320-10-25]
A security may also be designated as at fair value
through profit or loss, like IFRS. Unlike IFRS, US
GAAP has loans and loans held-for-sale categories
(see below).

There are no special requirements for financial Unlike IFRS, financial institutions - including banks,
institutions and other entities that engage in credit unions, finance companies, mortgage
transactions that involve mortgage activities or companies and savings institutions - that engage in
transactions. transactions that involve lending to, or financing the
activities of, others, and entities that engage in
transactions that involve mortgage activities or
transactions, have specific guidance on accounting
for loans and loans held for sale.

A financial asset qualifies for amortised cost Unlike IFRS, a financial asset is measured at
measurement only if it meets both of the following amortised cost if it is classified as a held-to-maturity
conditions: security or a loan other than loans held for sale.
• the asset is held within a business Held-to-maturity securities are securities that have a
model whose objective is to hold fixed maturity and fixed or determinable payments
assets in order to collect contractual and that the entity has the positive intent and ability
cash flows (the held-to-collect to hold until maturity.
criterion or held-to-collect business
model); and 'Loans' are non-derivative financial assets with fixed
or determinable payments, unless they meet the
• the contractual terms of the financial definition of a security. Loans are accounted for
asset give rise on specified dates to either at amortised cost or as held-for-sale (see
cash flows that are solely payments chapter 7.4).
of principal and interest on the
principal amount outstanding (the
SPPI criterion). [IFRS [Link]]
A financial asset that does not meet both of these
conditions it is measured at fair value. [IFRS [Link]]

Business model - The held-to-collect criterion (Business model)

IFRS US

The assessment of the objective of an entity's Unlike IFRS, an entity's business model for managing
business model for managing financial assets is not financial assets is not assessed when determining
based on management's intentions with respect to the classification of financial assets. Rather, these
an individual instrument, but rather is determined at classifications are based primarily on management's
a higher level of aggregation. This assessment intention and are dependent on an individual asset's
should reflect the way in which an entity manages its characteristics. For example, a financial asset that is
business(es). For example, a reporting entity may a debt security is classified as held-for-trading,
have more than one business model for managing available-for-sale or held-to-maturity. The

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 7. Financial instruments (IFRS compared to US GAAP)

financial assets. The level of assessment may be a classification of loans depends on the entity's intent
portfolio. [IFRS [Link]-B4.1.2] to either hold or sell them. [320-10-25-1, 948-310-
35-1]

If an entity's business model for a portfolio is to hold Unlike IFRS, sales of securities classified as held-to-
the assets in the portfolio in order to collect maturity, except for a very limited number of
contractual cash flows, then the portfolio may qualify reasons, 'taint' the entity's ability to classify
for measurement at amortised cost. However, not all securities as held-to-maturity (see chapter 7.4).
assets in such a portfolio have to be held to maturity [320-10-25-9]
for the objective of the business model to meet the
held-to-collect criterion, because there are few
business models that entail holding all instruments in
the portfolio until maturity. The following are
examples of situations in which sales of financial
assets may be regarded as being consistent with a
held-to-collect business model:
• a financial asset no longer meets the
entity's investment policy - e.g. the
asset's credit rating declines below
that required by the entity's
investment policy;
• an insurer adjusts its investment
portfolio to reflect a change in
expected duration - i.e. the expected
timing of payouts; or
• an entity needs to fund capital
expenditures. [IFRS 9.B4.1.3]

Acquiring financial assets with the objective of

selling them to a securitisation vehicle may be
consistent with a held-to-collect business model in
certain circumstances. [IFRS 9.B4.1.4]

Acquiring financial assets with incurred losses is not

in itself inconsistent with a held-to-collect business
model. [IFRS 9.B4.1.4]

The following are not consistent with a held-to-

collect business model:
• a portfolio that is actively managed
in order to realise fair value
changes;
• a portfolio that is managed and
whose performance is evaluated on
a fair value basis; or
• a portfolio of financial assets that
meets the definition of held for
trading. [IFRS 9 A, B4.1.5-B4.1.6]

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 7. Financial instruments (IFRS compared to US GAAP)

Cash flow characteristics - SPPI criterion (Cash flow characteristics)

IFRS US

To qualify for amortised cost measurement, the cash Unlike IFRS, a debt security is classified as held-to-
flows from a financial asset must represent, on maturity if management has the positive intent and
specified dates, solely payments of principal and ability to hold it to maturity. Accordingly, the security
interest on the principal amount outstanding. must have a maturity date to qualify for classification
'Principal' is not defined in the standard. However, as held-to-maturity. Unlike IFRS, the classification of
cash flows that are interest always have a close loans depends on the entity's intent to either hold
relation to the amount advanced to the debtor (the them for the foreseeable future or to sell them.
'funded' amount). 'Interest' is consideration for the [320-10-25-1, 948-310-35-1]
time value of money and for the credit risk
associated with the principal amount outstanding
during a particular period of time. The assessment
of whether cash flows meet this test is made in the
currency in which the financial asset is denominated.
[IFRS [Link]-4.1.3, B4.1.8, BC4.23]

Leverage is described as increasing the variability of Unlike IFRS, leverage in and of itself does not affect
the contractual cash flows such that they do not the classification of the instrument; however, the
have the economic characteristics of interest. existence of leverage may mean that an embedded
Leverage is not consistent with the SPPI criterion. derivative would be required to be bifurcated from
[IFRS 9.B4.1.9] the host contract (see chapter 7.2). [815-15-25-1,
25-16 - 25-19]

Contractual terms that permit the issuer to prepay Contractual terms that permit the issuer to prepay,
before maturity, the holder to put the financial asset the holder to put back to the issuer before maturity
back to the issuer before maturity, or either party to or either party to extend the term of a financial asset
extend the term of a financial asset, meet the SPPI would be evaluated as embedded derivatives to
criterion only if: determine whether bifurcation is required (see
chapter 7.2). [815-15-25-1, 25-16 - 25-19]
• the feature is not contingent on
future events or, if it is contingent, it
protects:
- the holder against a credit
deterioration or change in
control of the issuer; or
- the holder or the issuer against
changes in relevant taxation or
law; and
• in the case of a prepayment or put
feature, the prepayment amount
substantially represents unpaid
principal and interest, but may
include reasonable additional
compensation for early termination;
or
• in the case of a term extension
option, it results only in contractual

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 7. Financial instruments (IFRS compared to US GAAP)

cash flows during the extension

period that are solely payments of
principal and interest on the
principal amount outstanding. [IFRS
9.B4.1.10-B4.1.11]

Any contractual term that changes the timing or Unlike IFRS, any other contractual term that changes
amount of cash flows does not meet the SPPI the timing or amount of cash flows would be
criterion unless it is evaluated as an embedded derivative to determine
whether bifurcation is required (see chapter 7.2).
• a variable interest rate that [815-15-25-1, 25-16 - 25-19]
represents consideration for the
time value of money and credit risk;
or
• a qualifying prepayment, term
extension or put feature. [IFRS
9.B4.1.12]

A contractual term that is not genuine is not Unlike IFRS, US GAAP does not have explicit
considered in the assessment of whether a financial guidance on 'not genuine', which may give rise to
asset meets the SPPI criterion. A characteristic is not differences from IFRS in practice.
'genuine' if it affects the instrument's contractual
cash flows only on the occurrence of an event that is
extremely rare, highly abnormal and very unlikely to
occur. [IFRS 9.B4.1.18, BC4.24-BC4.25]

Non-recourse and limited recourse assets

IFRS US

A financial asset may have contractual cash flows Unlike IFRS, US GAAP does not contain explicit
that are described as principal and interest, but that guidance for the classification of non-recourse and
do not represent the payment of principal and limited recourse financial assets.
interest. This may be the case if the instrument
represents an investment in particular assets or cash
flows, or if a creditor's claims are limited to specified
assets, which may be financial or non-financial
assets. An example is a non-recourse financial
asset. [IFRS 9.B4.1.15-B4.1.16]

The fact that a financial asset is non-recourse does

not in itself necessarily prevent it from meeting the
SPPI criterion. The holder is required to assess the
underlying assets or cash flows. If the terms of the
financial asset being evaluated give rise to cash
flows other than principal and interest on the
principal amount outstanding, or if they limit the
cash flows in a manner inconsistent with them
representing principal and interest, then the SPPI
criterion is not met. [IFRS 9.B4.1.17]

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 7. Financial instruments (IFRS compared to US GAAP)

Contractually linked instruments

IFRS US

There is specific guidance for circumstances in Unlike IFRS, US GAAP does not contain explicit
which an entity prioritises payments to the holders of guidance for the classification of contractually linked
multiple contractually linked instruments that create securities.
concentrations of credit risk - i.e. tranches. The right
to payments on more junior tranches depends on
the issuer's generation of sufficient cash flows to pay
more senior tranches. A 'look-through' approach is
required to determine whether the SPPI criterion is
met. [IFRS 9.B4.1.20-B4.1.26]

Financial assets at fair value through profit or loss

IFRS US

If a financial asset does not meet the measurement Unlike IFRS, financial assets that do not qualify to be
criteria for amortised cost, then it is measured at measured at amortised cost (held-to-maturity
fair value and fair value changes are generally securities or loans not held for sale) are measured
recognised in profit or loss. [IFRS [Link], 5.7.1] at fair value through profit or loss (e.g. trading
securities, or derivatives that do not qualify as cash
flow or net investment hedges), fair value through
OCI (available-for-sale securities), the lower of cost
and fair value (loans held for sale) or cost (non-
marketable equity securities) (see chapter 7.4).
[310-10, 320-10-25]

An entity may choose to designate a financial asset, Like IFRS, an entity can choose to designate a
which would otherwise qualify for amortised cost financial asset, which would otherwise qualify for
accounting, as measured as at fair value through amortised cost or cost, as at fair value through profit
profit or loss. This optional designation is permitted or loss. Unlike IFRS, this optional designation (the
only if it eliminates or significantly reduces a fair value option) is permitted regardless of whether
measurement or recognition inconsistency (an it eliminates or significantly reduces an accounting
accounting mismatch) that would otherwise arise mismatch. Like IFRS, the election is irrevocable;
from measuring assets or liabilities, or recognising however, it is available both on initial recognition,
gains or losses on them, on different bases. The like IFRS, or on a remeasurement event, unlike
election is available only on initial recognition of the IFRS. [825-10-15-4]
asset and is irrevocable. [IFRS [Link], BC4.77-
BC4.80]

Classification of financial liabilities

IFRS US

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 7. Financial instruments (IFRS compared to US GAAP)

The classification requirements for financial liabilities See chapter 7.4

in IFRS 9 are similar to those in IAS 39. See chapter
7.4.

Recognition

IFRS US

The recognition requirements for financial See chapter 7.5.

instruments in IFRS 9 are similar to those in IAS 39.
See chapter 7.5.

Initial measurement

IFRS US

The initial measurement requirements in IFRS 9 are See chapter 7.6.

similar to those in IAS 39. See chapter 7.6.

Subsequent measurement

IFRS US

The following measurement requirements apply to The following measurement requirements apply to
all financial assets and financial liabilities. However, all financial assets and financial liabilities. However,
financial assets and financial liabilities that are like IFRS, financial assets and financial liabilities that
designated as hedged items may require further are designated as hedged items may require further
adjustment in accordance with the hedge accounting adjustment in accordance with the hedge accounting
requirements (see chapter 7.7). requirements (see chapter 7.7).

Amortised cost

IFRS US

Subsequent to initial recognition, amortised cost is Like IFRS, subsequent to initial recognition,
calculated using the effective interest method. [IFRS amortised cost is calculated using the effective
[Link], 5.3.1] interest method. However, there are differences
from IFRS in the determination of amortised cost -
e.g. in respect of transaction costs and whether
contractual or expected cash flows are used in the
computation. [835-30-35-2]

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 7. Financial instruments (IFRS compared to US GAAP)

Financial instruments at fair value

IFRS US

Financial instruments at fair value are measured at Like IFRS, financial instruments at fair value through
fair value and all changes in fair value, both realised profit or loss are measured at fair value and all
and unrealised, are recognised immediately in profit changes in fair value, both realised and unrealised,
or loss, with the exception of the following, which are recognised immediately in profit or loss.
are recognised in OCI: However, the instruments to which fair value
through profit or loss applies differ from the
• gains and losses on equity requirements under IFRS. Additionally, unlike IFRS,
investments not held for trading if other measurement methods are applied, including
the entity has elected to present fair value through OCI (available-for-sale securities),
such gains and losses in OCI; the lower of cost and fair value (loans held for sale),
• generally, the portion of the fair and cost (non-marketable equity securities). [310-
value changes of financial liabilities 10, 320-10-25]
designated as at fair value through
profit or loss that is attributable to
changes in credit risk of the issuer of
the liability. [IFRS [Link], 5.3.1,
5.7.5, 5.7.7]

An entity, at initial recognition only, may elect to Unlike IFRS, US GAAP has no such classification.
present in OCI changes in the fair value of an Securities (see chapter 7.4) may be classified as
investment in an equity instrument that is not held available-for-sale and reclassification is permitted in
for trading. The election is irrevocable and can be certain circumstances.
made on an instrument-by-instrument - e.g.
individual share - basis. [IFRS [Link]]

The amounts recognised in OCI are not reclassified Unlike IFRS, the amounts recognised in OCI in
to profit or loss on disposal of the investment or in respect of available-for-sale assets are reclassified
any other circumstances, although the amount to profit or loss on disposal of the assets.
recognised in OCI may be transferred within equity. Accordingly, there is impairment testing for these
Accordingly, there is no need for impairment testing assets (see chapter 7.6). [320-10-35-34, 35-34D]
for these assets. [IFRS 9.B5.7.1]

Dividend income on investments classified as at fair Dividend income on available-for-sale assets is

value through OCI is recognised in profit or loss recognised in profit or loss as it is earned, but we
when the right to receive payment is established, would not expect differences from IFRS in practice.
unless the dividend clearly represents a repayment If the dividend clearly represents a repayment of
of part of the investment. In this case, the dividend part of the investment, then it is accounted for as a
is recognised in OCI. [IFRS 9.B5.7.1, IAS 18.30] return of the investment, which is similar to the
outcome under IFRS. [320-10-35]

Gains or losses on a financial liability designated as Unlike IFRS, gains or losses on a financial liability
at fair value through profit or loss are generally designated at fair value through profit or loss are
presented as follows: recognised entirely in profit or loss.
(1) the amount of change in the fair
value of the financial liability that is
attributable to changes in the credit
risk of that liability is presented in

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 7. Financial instruments (IFRS compared to US GAAP)

OCI; and
(2) the remaining amount of change in
the fair value of the liability is
presented in profit or loss. [IFRS
[Link]]

However, if the treatment of the effects of changes

in the credit risk of the issuer of the liability
described in (1) would create or enlarge an
accounting mismatch in profit or loss, then all gains
and losses on that liability are presented in profit or
loss. [IFRS [Link].7-8]
All gains and losses on loan commitments and
financial guarantee contracts that are designated as
at fair value through profit or loss are recognised in
profit or loss. [IFRS [Link]]
Amounts presented in OCI under the split
presentation are never reclassified to profit or loss.
[IFRS 9.B5.7.9]

Reclassifications of financial assets

IFRS US

Classification of financial assets is determined on Transfers to or from the trading category are
initial recognition. Subsequent reclassification permitted only in rare circumstances. Like IFRS, the
between categories is generally prohibited. fair value option (see above) is an irrevocable
However, when, and only when, an entity changes election and therefore transfers from the fair value
its business model in a way that is significant to its option are prohibited. Unlike IFRS, there is specific
operations, it is required to reassess whether the guidance that permits transfers to fair value through
initial determination remains appropriate. If that profit or loss if there is a remeasurement event -
determination is no longer appropriate, then a e.g. a significant debt modification. [320-10-35-12,
reclassification of financial assets in accordance with 825-10-25-2, 25-4, 25-5]
the guidance on initial classification is required. Such
changes to business models are expected to be very A transfer from the available-for-sale category to the
infrequent. They are determined by senior held-to-maturity category is generally permitted
management of the entity as a result of internal or once any tainting period has lapsed (see chapter
external changes and are demonstrable to external 7.4) or if there is a change in intent or ability, unlike
parties. [IFRS [Link], 4.4.3, B4.4.1] IFRS. However, after securities are reclassified to
available-for-sale in response to a taint, judgement
is required in determining when circumstances have
changed such that management can assert that it
now has the intent and ability to hold debt securities
to maturity. [320-10-35-7]

A loan classified as loans held-for-sale may be

reclassified to a long-term investment category if the
entity has the intent and ability to hold it for the
foreseeable future or until maturity, unlike IFRS.
[948-310-25-1]

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 7. Financial instruments (IFRS compared to US GAAP)

If an entity determines that its business model has Unlike IFRS, reclassification may be required by a
changed in a way that is significant to its operations, change in intent - e.g. from loans held for sale to
then all affected assets are reclassified from the first loans - rather than by a change in a business model.
day of the next reporting period (the reclassification [320-10]
date). The change in business model needs to be
effected before the reclassification date. For
reclassification to be appropriate, the entity cannot
engage in activities consistent with its former
business model after the date of change in business
model. No prior periods are restated. [IFRS [Link],
B4.4.2]

If a financial asset is reclassified from being Like IFRS, any reclassification is at fair value at the
measured at amortised cost to being measured at reclassification date, which unlike IFRS can be other
fair value, then it is measured at fair value at the than a financial statement date; any gain or loss
reclassification date and any gain or loss arising arising on reclassification is recognised in profit or
from the difference between amortised cost and fair loss, like IFRS. Unlike IFRS, loans reclassified from
value is recognised in profit or loss. If a financial loans held for sale to loans are reclassified at their
asset is reclassified from being measured at fair carrying amount at the date of reclassification. [320-
value to being measured at amortised cost, then the 10-35-10]
fair value at the reclassification date becomes the
new carrying amount. [IFRS [Link]-5.6.3]

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