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

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Comparison between U.S. GAAP and International Financial Reporting Standards 102 7.4 Hedge accounting IFRS U.S. GAAP Relevant guidance: IAS 39 Relevant guidance: ASC 815 IAS 39 sets out extensive requirements on hedge accounting. Hedge accounting is purely optional but is only available to entities that have applied all of the requirements (IAS 39.71-102). Three types of hedge relationships exist (IAS 39.86): • Fair value hedge – a hedge of exposure to changes in value of a recognised asset or liability or unrecognized firm commitment (including portions thereof) • Cash flow hedge – a hedge of exposure to variability in cash flows associated with a recognised asset or liability or a forecasted transaction • Hedge of a net investment in a foreign operation IAS 39 hedge accounting is applied only if extensive conditions are met. These include requirements for (IAS 39.88): • Formal documentation, which must be in place at the inception of the hedge, setting out the hedging relationship and the enterprise's risk management strategy • The hedge itself to be highly effective and its effectiveness is capable of reliable measurement Where the conditions for hedge accounting are met: • For a fair value hedge, the hedged item is remeasured with any gain or loss being included in profit or loss (to offset the effect on profit or loss of the hedge instrument's change in fair value being carried in profit or loss). The hedge instrument is similarly remeasured (IAS 39.89-94). • For a cash flow hedge, the portion of the gain or loss on the hedging instrument that is an effective hedge is recognised in other comprehensive income (OCI) and the ineffective portion is normally recognised in profit or loss. The gain or loss in OCI is then recycled to profit or loss when the hedged item is recognised in profit or loss (IAS 39.95-101). • For a hedge of a net investment in a foreign operation, the accounting is the same as for cash flow hedges (IAS 39.102) Similar to IFRS (ASC 815-20). Similar to IFRS (ASC 815-20-05-1 and ASC Master Glossary “Fair Value Hedge” and “Cash Flow Hedge”). Similar to IFRS (ASC 815-20-25). However, U.S. GAAP permits a shortcut method under which an entity is allowed to assume no ineffectiveness in a hedging relationship of interest rate risk involving a recognized interest-bearing asset or liability and an interest rate swap (or a compound hedging instrument composed of an interest rate swap and a mirror-image call or put option) if certain conditions are met (ASC 815-20-25-102 through 25-117). Similar to IFRS: • For a fair value hedge – see ASC 815-25-35-1 through 35-4) • For a cash flow hedge – see ASC 815-30-35-3 through 35-4) • For a hedge of a net investment in a foreign operation, the accounting for the hedging instrument should be consistent with the accounting for translation adjustments (ASC 815-35-35-1) © 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 103 8. Group accounts 8.1 Basic requirements for group accounts IFRS Relevant guidance: IAS 27; IFRS 5 U.S. GAAP Relevant guidance: ASC 810-10; SEC Regulation S-X, Rule 5-04 Introduction A parent shall present consolidated financial statements that include all of its subsidiaries. However, a parent need not present consolidated financial statements if all of the conditions listed below are met (IAS 27.9-10): • The parent is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about and do not object to the parent not presenting consolidated financial statements • The parent's debt or equity is not traded in a public market • The parent is not in the process of filing its financial statements with a regulatory body for the purpose of issuing any class of instruments in a public market • The ultimate or intermediate parent of the parent produces consolidated financial statements that comply with IFRS A subsidiary is defined as “an entity, including an unincorporated entity such as a partnership that is controlled by another entity (known as the parent)” (IAS 27.4). A subsidiary shall not be excluded from consolidation because the investor is a venture capital organisation, mutual fund, unit trust, or similar entity (IAS 27.16). Note: The IASB and the FASB had been working on a joint project to provide comprehensive guidance for consolidation of all entities. The objective of that project was to consider comprehensive guidance for consolidation of all entities, including those controlled by voting or similar interests. In connection with this project, the IASB issued an Exposure Draft, Consolidated Financial Statements, in December 2008. In September 2010, the IASB published a staff draft that reflects the cumulative tentative decisions made by the Board through its May 2010 meeting. The proposed guidance would revise the definition of control and the related application guidance A parent shall consolidate all entities in which it has a controlling financial interest unless control does not rest with the majority owner (for example, if the subsidiary is in legal reorganization or in bankruptcy) (ASC 810-10-15-8 and 15-10). The existence of certain rights of a minority shareholder may also overcome the presumption of consolidation by the majority voting interest (ASC 810-10-15-10; ASC 810-10-25-2 through 25-14). Under U.S. GAAP, there is a presumption that consolidated financial statements are more meaningful than separate financial statements. Therefore, the election to present only separate financial statements if certain conditions apply is not permitted under U.S. GAAP. However, U.S. GAAP does provide limited exemptions from consolidation in certain specialized industries. © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
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