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

Comparison between U.S. GAAP and International Financial Reporting Standards 97
IFRS
When a derivative financial instrument gives one party a
choice over how it is settled (e.g. the issuer or the holder
can choose settlement net in cash or by exchanging
shares for cash), it is a financial asset or a financial
liability unless all of the settlement alternatives would
result in it being an equity instrument (IAS 32.26).
Redeemable preference shares are generally accounted
for as liabilities where they provide for mandatory
redemption for a fixed or determinable amount or give
the holder the right to require the issuer to redeem
(IAS 32.18).
Under IAS 39, financial liabilities are divided into two
main categories (IAS 39.9):
• At fair value through profit or loss, which includes:
U.S. GAAP
solely or predominantly on one of the following
(ASC 480-10-25-14):
• A fixed monetary amount
• Variations in something other than the fair value of
the issuer’s equity
• Variations inversely related to changes in the fair
value of the issuer’s equity shares
A mandatorily redeemable financial instrument is
classified as a liability unless the redemption is required
to occur only upon the liquidation or termination of the
reporting entity (ASC 480-10-25-4).
Under U.S. GAAP financial liabilities may be categorized
as follows:
• At fair value through earnings, which includes:
Held-for-trading financial liabilities (including all
derivative financial liabilities)
Financial liabilities designated irrevocably into
this category on initial recognition
• Other financial liabilities (at amortised cost)
Derivatives classified as liabilities (see Section
7.3, “Recognition and measurement of
derivatives”)
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) which the entity has
irrevocably elected to measure at fair value
(ASC 815-15-25-4)
Financial liabilities within the scope of ASC 480
that are not covered by the guidance in
ASC 480-10-35-3
Eligible financial liabilities that the entity elects to
measure at fair value under the fair value option
(ASC 825-10-15-4)
• Forward contracts that require physical settlement by
repurchase of a fixed number of the issuer’s equity
shares in exchange for cash and mandatorily
redeemable financial instruments (ASC 480-10-35-3)
• Liabilities carried at amortized cost
Split accounting is applied to compound instruments
(such as convertible debt) that contain both a liability
and an equity element. For convertible debt, the debt
element is accounted for as a liability and the option to
convert to equity is treated as an equity instrument (as
long as option embedded is for a fixed number of
shares) (IAS 32.28-32).
Generally, convertible debt with a nondetachable
conversion feature is accounted for completely as debt.
However, when convertible debt is issued at a substantial
premium, the premium is treated as paid-in capital. In
addition, when a nondetachable conversion feature is in
the money at the commitment date, the embedded
beneficial conversion feature is recognized and
measured by allocating a portion of the proceeds equal to
the intrinsic value of that feature to additional paid-in
capital (ASC 470-20-25). Also, the issuer must account
separately for the liability and equity components of
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