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Fair value measurements — Key differences between U.S. GAAP and IFRSs

Under U.S. GAAP, ASC 820 is the primary source of guidance on how to measure fair value.

Under IFRSs, IFRS 13, Fair Value Measurement, is the primary source of guidance on how to measure fair value. IFRS 13 was the result of a joint project between the FASB and the IASB to develop common requirements for measuring fair value and disclosing information about fair value measurements.

Although ASC 820 and IFRS 13 are largely converged, they are not identical. For example, there are differences in spelling and differences in references to other U.S. GAAP and IFRSs. Further, U.S. GAAP and IFRSs differ in their requirements for when an entity is required or permitted to measure items at fair value.

The table below summarizes these differences and is followed by a detailed explanation of each difference.1

Subject

U.S. GAAP

IFRSs

Inception gains and losses

If an asset or a liability is measured initially at fair value under U.S. GAAP, any difference between the transaction price and fair value is recognized immediately as a gain or loss in earnings unless otherwise specified.

IFRSs state that an entity cannot recognize inception gains or losses for a financial instrument unless the instrument’s fair value is demonstrated by a quoted price in an active market for an identical asset or liability or based on a valuation technique in which an entity uses only observable market data.

Net asset value (NAV) practical expedient

In U.S. GAAP, there is a practical expedient that permits an entity with an investment in an investment company to use, as a measure of fair value in specific circumstances, the reported NAV without adjustment.

IFRSs do not provide an NAV practical expedient for investments in investment companies.

Financial liabilities with demand features

In U.S. GAAP, the fair value measurement of a deposit liability is described as the amount payable on demand as of the reporting date.

Under IFRSs, the fair value measurement of a financial liability with a demand feature (e.g., a demand deposit) cannot be less than the present value of the amount payable on demand.

Disclosures

In U.S. GAAP, there is no requirement to provide a quantitative sensitivity analysis for recurring fair value measurements of financial instruments classified in Level 3 of the fair value hierarchy.

IFRSs require that entities provide a quantitative sensitivity analysis for recurring fair value measurements of financial instruments classified in Level 3 of the fair value hierarchy.

Inception Gains and Losses

Inception gains and losses may occur if an asset or liability is measured at initial recognition at fair value in the financial statements and the entity acquired or issued the asset or liability at an amount other than fair value (i.e., if the initial transaction price is different from fair value). ASC 820-10-30-6 states that “[i]f another Topic requires or permits a reporting entity to measure an asset or a liability initially at fair value and the transaction price differs from fair value, the reporting entity shall recognize the resulting gain or loss in earnings unless that Topic specifies otherwise.”

Paragraph B5.1.2A of IFRS 9 (2014), Financial Instruments (or, for entities that have not adopted IFRS 9, paragraph AG76 of IAS 39, Financial Instruments: Recognition and Measurement), prohibits recognition of inception gains or losses for a financial asset or financial liability if fair value is demonstrated by Level 2 or Level 3 inputs or based on a valuation technique in which an entity uses unobservable market data. In such cases, the measurement is adjusted to defer the inception gain or loss. The deferred gain or loss is recognized “only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability.”

NAV Practical Expedient

The U.S. GAAP accounting requirements for measuring the fair value of investments in investment companies differ from those in IFRSs. Under U.S. GAAP, ASC 820-10-35-59 contains a practical expedient that permits entities to measure the fair value of an investment that (1) does not have a readily determinable fair value and (2) is in an investment company within the scope of ASC 946 or a real estate fund for which it is industry practice to apply investment-company accounting at NAV. However, the IASB has decided against providing any such practical expedient. In the U.S. GAAP–IFRS comparison section in the opening summary in ASU 2011-04, the FASB explains the IASB’s decision as follows: Because IFRSs do not have accounting requirements that are specific to . . . investment companies, the IASB decided that it would be difficult to identify when such a practical expedient could be applied given the different practices for calculating net asset values in jurisdictions around the world. For example, . . . investment companies may report in accordance with national GAAP, which may have recognition and measurement requirements that differ from those in IFRSs (that is, the underlying investments might not be measured at fair value or they might be measured at fair value in accordance with national GAAP, not IFRSs).

Financial Liabilities With Demand Features

Under U.S. GAAP, ASC 942-470-50-1 states that the fair value of a demand liability with no defined maturities “is the amount payable on demand at the reporting date.” Under IFRSs, paragraph 47 of IFRS 13 indicates that the fair value of a demand deposit cannot be “less than the [present value of the] amount payable on demand, discounted from the first date that the amount could be required to be paid.”

Disclosures

The disclosure requirements in IFRS 13 are largely similar to those under U.S. GAAP, with a few exceptions, including the following:

  • Under IFRSs, paragraph 93(h)(ii) of IFRS 13 requires entities to perform a quantitative measurement uncertainty analysis for financial instruments measured at fair value and categorized in Level 3 of the fair value hierarchy. There is no such requirement under U.S. GAAP.
  • Under U.S. GAAP, ASC 820-10-50-2F exempts nonpublic entities from certain fair value disclosure requirements. Under IFRSs, there is no similar exemption.

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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.