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Fair value option (before adoption of IFRS 9): Key differences between U.S. GAAP and IFRSs

IFRS 9, Financial Instruments, which was issued in November 2009 and most recently amended in July 2014, is effective for annual periods beginning on or after January 1, 2018, although entities can elect to apply it earlier. IFRS 9 supersedes IAS 39, Financial Instruments: Recognition and Measurement. In this comparison, it is assumed that an entity is applying IAS 39 and has not yet adopted IFRS 9. For key differences between U.S. GAAP and IFRSs for an entity that has adopted IFRS 9, click here.

Like ASC 825, IFRSs contain an FVO for certain financial assets and financial liabilities. That option is described in paragraphs 9 and 11A of IAS 39. Under both ASC 825 and IAS 39, election of the FVO (1) may be made at initial recognition, (2) is generally irrevocable, and (3) causes changes in fair value to be recognized in earnings (referred to as "profit or loss" under IFRSs). In addition, both sets of standards require that up-front fees and costs related to items for which the FVO is elected be recognized in earnings as incurred and not deferred.

Qualifying Criteria

IAS 39 requires entities to meet certain qualifying criteria before they can elect the FVO for an otherwise eligible item. Under ASC 825, there are no such qualifying criteria.

Paragraph 9 of IAS 39 specifies that entities may use the FVO for financial assets or financial liabilities "when doing so results in more relevant information," which may occur in either of the following situations:

  • A financial asset or liability "eliminates or significantly reduces a measurement or recognition inconsistency . . . that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases."
  • A "group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity's key management personnel."

Further, paragraph 11A of IAS 39 specifies that an entity may use the FVO for a hybrid contract that contains an embedded derivative unless either of the following conditions applies:

  • The "embedded derivative(s) does not significantly modify the cash flows that otherwise would be required by the contract."
  • "[I]t is clear with little or no analysis . . . that separation of the embedded derivative(s) is prohibited."

Eligible Items

The items to which the FVO can be applied under ASC 825 are similar to those under IAS 39. Under each standard, the FVO can be applied to financial assets and financial liabilities that are not otherwise outside the standard’s scope. Neither standard permits election of the FVO for (1) an investment in an entity for which consolidation is required, (2) employers' rights and obligations under employee benefit plans, (3) rights and obligations under leases, or (4) financial instruments classified in shareholders' equity.

However, because of some differences in each standard’s scope, election of the FVO is not always allowed for the same items. For example, ASC 825 permits election of the FVO for certain contracts that are outside the scope of IAS 39 and IFRS 9, such as insurance contracts and warranties that are not financial instruments. In addition, IAS 39 precludes application of the FVO to an investment in an equity instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured. ASC 825 does not contain this exception. Furthermore, ASC 825 permits application of the FVO to equity method investments. With limited exceptions, IAS 39 excludes equity method investments (referred to as "associates") from the scope of the FVO.

Election Dates

Unlike IFRSs, ASC 825 permits the FVO to be elected not only upon initial recognition of an eligible item but also on certain subsequent election dates. Under ASC 825, such election dates include dates on which:

  • An "investment becomes subject to the equity method of accounting."
  • An investment is deconsolidated.

Under IAS 39, the FVO is not available in such situations since it may only be elected at initial recognition.

Correction list for hyphenation

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