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

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Comparison between U.S. GAAP and International Financial Reporting Standards 94 IFRS the categories below. Note that the fair value option may not be applied to unquoted equity investments whose fair value cannot be measured reliably. The contract contains one or more embedded derivatives (IAS 39.11A) The designation results in more relevant financial information because it eliminates an accounting mismatch or a group of financial assets, financial liabilities, or both are managed and evaluated on a fair value basis Transfers into or from the fair value through profit or loss category are now similar to U.S. GAAP (IAS 39.50-.54). Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than (IAS 39.9): • Held-for-trading assets • Those designated on initial recognition as at fair value through profit or loss or as available-for-sale. An entity may reclassify out of fair value through profit or loss if certain criteria are met (see above). • Those where the holder may not recover substantially all of its investment (other than due to credit deterioration), which are classified as available-for-sale U.S. GAAP be separated into a host and derivative component under ASC 815-15-25-1 which the entity has irrevocably elected to measure at fair value (ASC 815-15-25-4) • Eligible financial assets that the entity elects to measure at fair value – fair value option (ASC 825-10-15-4) Transfers into or from the trading category should be rare (ASC 320-10-35-12). A loan is a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor’s balance sheet (ASC Master Glossary, “Loan”). Loans that are not considered debt securities may not be categorized in the trading, available-for-sale, or held-tomaturity categories provided by ASC 320. Measurement on initial recognition When a financial asset is recognised initially, an entity measures it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset (IAS 39.43). Financial assets are recognized initially at fair value. This may lead to the recognition of premiums and discounts on loans and debt securities acquired. Except for certain costs associated with certain lending activities and loan purchases, transaction costs that are directly attributable to the purchase of a financial asset are expensed as incurred (ASC 310-20-25-2 through 25-7). Subsequent measurement Subsequent treatment (IAS 39.46 and .55): • Remeasure financial assets at fair value through profit or loss at fair value with gains and losses going to the income statement • Carry held-to-maturity financial assets and loans and receivables at amortized cost (no similar special rules as under U.S. GAAP for deterioration in credit quality) Subsequent treatment: • Remeasure financial assets at fair value through earnings at fair value with gains and losses going to the income statement (derivatives see ASC 815-10- 35-1 to 35-3; hybrid financial instruments see ASC 815-15-25-4; trading securities see ASC 320-10-35-1. • Carry held-to-maturity securities, loans held for investment, and trade receivables at amortized cost. Special rules apply for certain acquired loans with deterioration in credit quality (ASC 320-10-25-3, ASC 310-10-35-41 through 35-42 and ASC 825-10-35-2 © 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 95 IFRS U.S. GAAP through 35-3, and ASC 310-30-35). • Remeasure available-for-sale financial assets to fair value and take gains or losses through equity (comprehensive income) until point of sale (when recycled to income statement) • Investments in equity instruments that do not have quoted prices in active markets and whose fair value cannot be reliably measured shall be measured at cost (IAS 39.46(c)) • Remeasure available-for-sale securities to fair value. Unrealized gains and losses are included (net of tax) in shareholder’s equity in other comprehensive income. All or a portion of the unrealized holding gain and loss of an available-for-sale security that is designated as being hedged in a fair value hedge is recognized in earnings during the period of the hedge. Realized gains and losses are reported in earnings (ASC 320-10-35-1). Derecognition IAS 39 addresses derecognition specifically in relation to financial instruments. Assets are derecognised when the enterprise loses control of the contractual rights that comprise the financial assets. IAS 39's derecognition principles operate via a five-step process, which focuses on the transfer of risks and rewards as follows (there is no isolation in bankruptcy test) (IAS 39.15-37): • Financial assets are derecognised when an entity transfers substantially all the risks and rewards of ownership • Financial assets are not derecognised when an entity retains substantially all the risks and rewards of ownership • If the entity neither transfers nor retains substantially all the risks and rewards of ownership it shall determine whether it has retained control • If it has not retained control, derecognise the financial assets and recognise as separate assets or liabilities any rights or obligations created or retained • If it has retained control, partially continue to recognise the asset to the extent of its continuing involvement A transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the transferor surrenders control over those financial assets shall be accounted for as a sale if and only if all of the following conditions are met (ASC 860-10-40-4 through 40-5) : • Transferred assets have been isolated from the transferor – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership • Transferee has the right to pledge or exchange the assets (or beneficial interests) received, without any constraints • Transferor does not maintain effective control over the transferred asset Impairment If there is objective evidence that a financial asset is impaired, its recoverable amount must be determined and any impairment loss recognised in the income statement. Where such evidence exists, impairment reviews are relevant to assets carried at amortised cost or assets categorised as available-for-sale (although carried at fair value, the gains or losses are included in For available-for-sale and held-to-maturity securities, if an entity determines that a decline in fair value below the amortized cost basis is other than temporary: • The cost basis of the individual security is written down to fair value and the write-down is included in earnings (i) for all equity securities and (ii) for debt © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
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