This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Fair value option (after adoption of IFRS 9 and ASU 2016-01): 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 January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retained many current requirements, it significantly revised an entity’s accounting related to the classification and measurement of investments in equity securities. For public business entities, the ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.

It is assumed that an entity is applying IFRS 9 and ASU 2016-01. Therefore, any references to ASC 825 below will refer to the guidance in ASC 825 as amended by ASU 2016-01.

For key differences between U.S. GAAP and IFRSs in the election of and accounting for the fair value option before adoption of IFRS 9 and ASU 2016-01, click here.

Under U.S. GAAP, ASC 825 is the primary source of guidance on the election of and accounting for the fair value option (FVO).

Under IFRSs, IFRS 9 is the primary source of guidance on the election of and accounting for the FVO.

The FVO under ASC 825 is similar to the FVO under IFRS 9. Like ASC 825, IFRSs permit election of the FVO for certain financial assets and financial liabilities under specific circumstances. That option is described in paragraphs 4.1.5, 4.2.2, 4.3.5, and 6.7.1 of IFRS 9. Under both ASC 825 and IFRS 9, 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 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.

The table below summarizes the key differences between the FVO under ASC 825 and that under IFRS 9. The table is followed by a detailed explanation of each difference.1

Subject U.S. GAAP IFRSs
Scope and qualifying criteria Entities may elect the FVO for most financial assets and financial liabilities; their ability to elect the FVO for eligible financial instruments is generally not limited. Entities may elect the FVO for most financial assets and financial liabilities when qualifying criteria are met.
Election dates Entities may elect the FVO at initial recognition of a financial instrument or upon the occurrence of certain specified events, such as when a previously recognized financial instrument becomes subject to the equity method of accounting. Entities may elect the FVO at initial recognition of a financial instrument. For financial instruments that represent credit exposures, election may be made after initial recognition or while the instrument is unrecognized.
Presentation of fair value changes of financial liabilities

For financial liabilities for which the FVO has been elected, entities defer fair value changes associated with credit risk through other comprehensive income (OCI).

The balance in accumulated OCI (AOCI) is released into earnings upon derecognition of the financial liability.

For financial liabilities for which the FVO has been elected, entities defer fair value changes associated with credit risk through OCI unless doing so would create or increase an “accounting mismatch” (i.e., an inconsistency in measurement or recognition).

The balance in AOCI is not released into earnings upon derecognition of the financial liability.

Scope and Qualifying Criteria

Scope

The items to which the FVO can be applied under ASC 825 are similar to those under IFRS 9.

Under both standards, the FVO can be applied to financial assets and financial liabilities that are not otherwise outside the scope of the guidance. 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 the scope of ASC 825 differs from that of IFRS 9 in certain respects, election of the FVO is not always permitted for the same items. For example, ASC 825 permits election of the FVO for certain contracts that are outside the scope of IFRS 9 such as insurance contracts and warranties that are not financial instruments. Furthermore, ASC 825 permits application of the FVO to equity method investments. With limited exceptions, equity method investments (referred to as “associates”) are outside the scope of the FVO under IFRS 9.

Qualifying Criteria

Under IFRSs, IFRS 9 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. IFRS 9 provides separate qualifying criteria for financial assets, financial liabilities, and financial instruments for which an entity manages credit risk by using credit derivatives.

For financial assets, paragraph 4.1.5 of IFRS 9 permits an entity to elect the FVO if it “eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.”

For financial liabilities, paragraph 4.2.2 of IFRS 9 permits an entity to elect the FVO “when doing so results in more relevant information,” which may occur in either of the following situations:

  • The FVO “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 liabilities or financial assets and financial liabilities 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 4.3.5 of IFRS 9 specifies that if “the host is not an asset” within the standard’s scope, an entity may use the FVO for a hybrid contract that contains one or more embedded derivatives unless either of the following conditions applies:

  • “[T]he embedded derivative(s) do(es) 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, such as a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortised cost.”

Finally, paragraph 6.7.1 of IFRS 9 permits an entity to elect the FVO for all or part of a financial instrument, even if it is outside the scope of IFRS 9 (e.g., an unrecognized instrument), provided that the following criteria are met:

  • The credit risk of the designated financial instrument, or part of the financial instrument, is managed by using a “credit derivative that is measured at fair value through profit or loss.”
  • The reference entity associated with the credit derivative matches the entity associated with the financial instrument that gives rise to the credit risk (e.g., a borrower or holder of a loan commitment).
  • The financial instrument has the same seniority as the financial instrument that can be delivered to the counterparty associated with the credit derivative in accordance with the terms of IFRS 9.

Under ASC 825-10-25-2(c), however, an entity is only permitted to apply the FVO to “an entire instrument and not to only specified risks, specific cash flows, or portions of that instrument.”

Election Dates

Both ASC 825 and IFRS 9 permit the election of the FVO at initial recognition. Unlike IFRSs, ASC 825 also permits the election to be made for an existing financial instrument when the instrument becomes subject to the equity method of accounting (e.g., because the investor now has significant influence over the investee).

IFRS 9 also permits the election of the FVO for financial instruments to the extent a credit derivative is used to manage credit risk, at initial recognition, after initial recognition, or while the financial instrument is unrecognized. There is no similar guidance under U.S. GAAP.

Note that when first adopting IFRS 9, an entity is also permitted, in accordance with certain transitional provisions, to designate financial assets and financial liabilities at fair value through profit or loss as of the date of the standard’s initial application. The transition guidance in ASU 2016-01 does not permit entities to make such a designation.

Presentation of fair value changes of financial liabilities

Under both ASC 825 and IFRS 9, changes in the fair value of a financial asset or financial liability for which the FVO has been elected are recognized in earnings (profit or loss). Further, for qualifying financial liabilities for which the FVO has been elected, both standards require that the fair value change associated with the liability’s credit risk be recognized in OCI.

Unlike U.S. GAAP, paragraph 5.7.7 of IFRS 9 contains an exception under which deferral of the credit risk component through OCI is precluded if the deferral would “create or enlarge an accounting mismatch in profit or loss.”

Unlike IFRSs, upon derecognition of a liability for which fair value changes attributable to the liability’s credit risk have been recognized through OCI, ASC 825-10-45-6 requires that the credit risk component be released through earnings upon derecognition of the financial liability. Paragraph B5.7.9 of IFRS 9 does not permit the OCI component to be subsequently released into earnings (or profit or loss) upon derecognition of the liability.

____________________

1 Differences are based on comparison of authoritative literature under U.S. GAAP and IFRSs and do not necessarily include interpretations of such literature.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.