Under US GAAP,theguidance for the classification of financial assetsis codified in different sections of the Accounting Standards Codification (ASC) depending on the type of instrument or entity. IFRS 9 contains all the classification and measurement guidance for financial assets and does not provide any industry-specific guidance. The specialized US guidance and the singular IFRS guidance in relation to classification can drive differences in measurement (because classification drives measurement under both IFRS and US GAAP).
Under IFRS 9, investments in equity instruments are measured at fair value through profit or loss (FVTPL) with an irrevocable option to measure those instruments at fair value through other comprehensive income (FVOCI) with no subsequent reclassification to profit or loss. Under US GAAP, investments in equity instruments are generally measured at FVTPL, with an alternative measurement option for equity investments without a readily determinable fair value.
Under IFRS 9, investments in debt instruments are either measured at: (1) amortized cost, (2) FVOCI (with subsequent reclassification to profit or loss) or (3) FVTPL, depending on the entity’s business model for managing the assets and the cash flows characteristic of the instrument, regardless of legal form. Under US GAAP, the legal form of a debt instrument primarily drives classification. For example, available-for-sale(AFS)debt instruments that are securities in legal form are typically carried at fair value, even if there is no active market to trade the securities. At the same time, a debt instrument that is not in the form of a security (for example, a corporate loan) is accounted for at amortized cost even though both the security and the loan have similar economic characteristics. In addition to these classification differences, the interest income recognition models also differ between the frameworks.Further, although the credit impairment accounting guidance under both US GAAP and IFRS is an “expected” loss model, theguidance isnot converged. The major difference is that under US GAAP, the entire lifetime expected credit loss on financial instruments measured at amortized cost is recognized at inception, whereas under IFRS 9, generally only a portion of the lifetime expected credit loss is initially recognized. Subsequently, if there is a significant increase in credit risk, the entire lifetime credit loss is recognizedunder IFRS.Under US GAAP, a separate incurred credit loss model applies to debt securities classified as available-for-sale. Under IFRS, the expected credit loss model applies equally to debt instruments measured at FVOCI.
The impairment guidance in ASC 326 was effective for public business entities that are SEC filers for annual reporting periods (including interim periods) beginning after December 15, 2019 and is effective for nonpublic entities for periods beginning after December 15, 2022. The guidance in ASU 2022-02, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, is effective for periods beginning after December 15, 2022. The IFRS 9 impairment guidance was effective as of January 1, 2018. The impairment guidance in this chapter compares the US GAAP guidance after adoption of ASC 326 and ASU 2022-02 with the impairment guidance under IFRS 9.
Finally, this section describes the fundamental differences in the ways that US GAAP and IFRS assess the derecognition of financial assets. These differences can have a significant impact on a variety of transactions, such as asset securitizations and factoring transactions. IFRS focuses on whether a qualifying transfer has taken place, whether risks and rewards have been transferred, and, in some cases, whether control over the asset in question has been transferred. US GAAP focuses on whether an entity has surrendered effective control over a transferred asset; this assessment also requires the transferor to evaluate whether the financial asset has been “legally isolated,” even in the event of the transferor’s bankruptcy or receivership.While the same conclusion on derecognition may often be reached under IFRS and US GAAP, it is important to work through the different modelsas the results may differ.
This chapter focuses on financial assets – both debt and equity investments – which do not result in the investor having significant influence or control over the investee. The consolidation and equity method of accounting models are covered in Chapter 12.It captures several of the more significant GAAP differences but is not inclusive of all differences between the frameworks in this area.
Technical references
US GAAP
ASC 310, ASC 320, ASC 321, ASC 325-10, ASC 325-20, ASC 325-40, ASC 326, ASC 815, ASC 815-15, ASC 820, ASC 825, ASC 860
IFRS
IFRS 9, IFRS 13, IAS 32
