The Impact of IFRS for EPM Reporting – Part 6

In Part 6, I want to provide more detail on the similarities and differences for reporting Financial Instruments. The details below were from notes I took during a presentation during a company sponsored educational seminar about IFRS.

Financial Instruments

Similarities

Both require financial instruments to be classified into specific categories to determine measurement

Both require the recognition of all derivatives on the balance sheet

Hedge accounting is permitted under both

Both require detailed disclosures in the footnotes Differences

Fair value measurement

• US GAAP – one measurement model (FAS 157) based on exit price
• IFRS – various standards use slightly varying wording to define fair value – transaction price at inception date is generally considered fair value

Use of fair value option

• US GAAP – financial instruments can be measured at fair value with changes in income
• IFRS – financial instruments can be measured at fair value with changes in income, when certain criteria (more restrictive) are met

Differences

Day one profits

• US GAAP – can recognize day one gains on financial instruments even when all inputs to the measurement model are not observable
• IFRS – only recognized when all inputs are observable

Debt vs. equity classification

• US GAAP – certain instruments with characteristics of both debt and equity must be classified as liabilities
• IFRS – classification focuses on the contractual obligation

Compound (hybrid) financial instruments

• US GAAP – not bifurcated into debt and equity components, but may be bifurcated into debt and derivative components
• IFRS – required to be split into a debt and equity component, and if applicable a derivative component

Hedge effectiveness – short cut method

• US GAAP – permitted
• IFRS – not permitted

Hedging a component of a risk in a financial instrument

• US GAAP – risk components that may be hedged are specifically defined – no additional flexibility
• IFRS – allows entities to hedge components of risk that give rise to changes in fair value

Impairment recognition – available for sale debt instrument

• US GAAP – may have an impairment due solely to a change in interest rate if the entity does not have the positive ability and intent to hold the asset
• IFRS – generally only evidence of a credit default results in impairment of an AFS debt instrument

Convergence

In 2007, the IASB exposed a discussion paper to propose one measurement model for fair value whenever fair value is required. This paper was consistent with the concepts in FAS 157. Both boards appear to be moving towards ultimately measuring all financial instruments at fair value with changes in fair value reported through income.