Comparison between U.S. GAAP and International ... - Grant Thornton

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Comparison between U.S. GAAP and International Financial Reporting Standards 100 IFRS IFRIC 19 clarified the requirements for extinguishing financial liabilities with equity (debt for equity swaps). U.S. GAAP • The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes delivery of cash, other financial assets, goods or services, or reacquisition by the debtor of its outstanding debt securities whether the securities are canceled or held as so-called treasury bonds. • The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. Treasury shares Under IAS 32, treasury shares are presented in the statement of financial position as a deduction from equity. Acquisition of treasury shares is presented as a change in equity. No gain or loss is recognised in profit or loss on the sale, issuance, or cancellation of treasury shares. Consideration paid or received is presented as a change in equity (IAS 32.33). Similar to IFRS (ASC 505-30-45-1). However, any price paid in excess of the amount accounted for as the cost of treasury shares should be attributed to the other elements of the transaction and accounted for according to their substance (ASC 505-30-30-2 through 30-4). 7.3 Recognition and measurement of derivatives IFRS U.S. GAAP Relevant guidance: IAS 39 Relevant guidance: ASC 815 Characteristics of derivatives One characteristic of a derivative under IAS 39 is that it is settled at a future date (IAS 39.9). Under IAS 39 the characteristics of a derivative do not require net settlement. Given the added U.S. GAAP net settlement requirement not found in IAS 39, certain financial instruments may meet the definition of a derivative under IAS 39 but not under U.S. GAAP. Under IAS 39 the characteristics of a derivative do not include notional amounts (IAS 39.9). Given the added U.S. GAAP notional amounts requirement not found in IAS 39, certain financial instruments may meet the definition of a derivative under IAS 39 but not under U.S. GAAP. Settlement at a future date is not a required characteristic of a derivative (ASC 815-10-15-83). Under U.S. GAAP, one of the characteristics of a derivative is net settlement; specifically that (ASC 815-10-15-83): • Its terms require or permit net settlement • It can readily be settled net by a means outside the contract, or • It provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement U.S. GAAP requires that the derivative contract be based on one or more notional amounts (ASC 815-10-15-83). Basic accounting requirements Derivatives, which may be assets or liabilities, are classified at fair value through profit or loss, unless they Derivative instruments are classified as assets and liabilities at fair value, except those designated as © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
Comparison between U.S. GAAP and International Financial Reporting Standards 101 IFRS are financial guarantee contracts or designated and effective hedging instruments (IAS 39.9). All derivative instruments are recognised initially at fair value. All changes in fair value are recognised in the profit or loss (with limited exceptions under hedge accounting provisions). (See Section 7.1, “Recognition and measurement of financial assets” and Section 7.2, “Presentation, recognition, and measurement of financial liabilities and equity” for more on accounting for financial assets and liabilities at fair value through profit or loss.) U.S. GAAP hedging instruments (815-10-25-1). Similar to IFRS (ASC 815-10-30-1, 35-1 and 35-2). Embedded derivatives An embedded derivative is a component of a hybrid instrument that includes both a derivative and a host contract, with the effect that some of the cash flows of the combined instrument vary in a similar way to a stand-alone derivative (IAS 39.10). An embedded derivative is separated from the host contract and accounted for as a derivative under IAS 39 when (IAS 39.11): Similar to IFRS (ASC 815-15-05-1 and ASC Master Glossary “Embedded Derivative”). Similar to IFRS (ASC 815-15-25-1). • Its economic characteristics are not closely related to those of the host contract • A separate instrument with the same terms would be a derivative, and • The hybrid instrument is not measured at fair value with changes recognised in profit or loss If an embedded derivative cannot be separately measured, the entire contract should be treated at fair value through profit or loss (IAS 39.12). Instruments containing embedded derivatives may be designated irrevocably on initial recognition as being at fair value through profit or loss, with limited exceptions (IAS 39.11A). IAS 39 and ASC 815 apply the criteria for determining whether a financial instrument contains an embedded derivative differently. Appendix A of IAS 39 contains authoritative application guidance and examples that should be considered in determining whether embedded derivatives need to be separated and carried at fair value through profit or loss. Financial liabilities that are hybrid financial instruments that would be required to be bifurcated into a host and derivative component (ASC 815-15-25-1) that the entity has irrevocably elected to measure at fair value are accounted for at fair value through earnings (ASC 815-15-25-4). The guidance and examples in ASC 815 should be considered in determining whether embedded derivatives need to be separated and carried at fair value through profit or loss. © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
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