IFRS for SMEs — U.S. GAAP Comparison Wiki

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Other Financial Instruments Issues

SME Par.IFRS SMEU.S. GAAP
Scope of Sections 11 and 12
12.1 Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues together deal with recognising, derecognising, measuring, and disclosingfinancial instruments (financial assets and financial liabilities). Section 11 applies to basic financial instruments and is relevant to all entities. Section 12 applies to other, more complex financial instruments and transactions. If an entity enters into only basic financial instrument transactions then Section 12 is not applicable. However, even entities with only basic financial instruments shall consider the scope of Section 12 to ensure they are exempt.  
Accounting policy choice
12.2 An entity shall choose to apply either:
  1. the provisions of both Section 11 and Section 12 in full, or
  2. the recognition and measurement provisions of IAS 39 Financial Instruments: Recognition and Measurement and the disclosure requirements of Sections 11and 12
to account for all of its financial instruments. An entity’s choice of (a) or (b) is an accounting policy choice. Paragraphs 10.8–10.14 contain requirements for determining when a change in accounting policy is appropriate, how such a change should be accounted for, and what information should be disclosed about the change in accounting policy.		 This document does not address differences between IAS 39 and U.S. GAAP.
Scope of Section 12
12.3 Section 12 applies to all financial instruments except the following:
  1. those covered by Section 11.
  2. interests in subsidiaries (see Section 9 Consolidated and Separate Financial Statements), associates (see Section 14 Investments in Associates) and jointventures (see Section 15 Investments in Joint Ventures).
  3. employers’ rights and obligations under employee benefit plans (see Section 28 Employee Benefits).
  4. rights under insurance contracts unless the insurance contract could result in a loss to either party as a result of contractual terms that are unrelated to:
    1. changes in the insured risk;
    2. changes in foreign exchange rates; or
    3. a default by one of the counterparties.
  5. financial instruments that meet the definition of an entity’s own equity (see Section 22 Equity and Section 26 Share-based Payment).
  6. leases (see Section 20 Leases) unless the lease could result in a loss to the lessor or the lessee as a result of contractual terms that are unrelated to:
    1. changes in the price of the leased asset;
    2. changes in foreign exchange rates; or
    3. a default by one of the counterparties.
  7. contracts for contingent consideration in a business combination (see Section 19 Business Combinations and Goodwill). This exemption applies only to the acquirer.
  
12.4 Most contracts to buy or sell a non-financial item such as a commodity, inventory, or property, plant and equipment are excluded from this section because they are not financial instruments. However, this section applies to all contracts that impose risks on the buyer or seller that are not typical of contracts to buy or sell tangible assets. For example, this section applies to contracts that could result in a loss to the buyer or seller as a result of contractual terms that are unrelated to changes in the price of the non-financial item, changes in foreign exchange rates, or a default by one of the counterparties. IFRS SMEs does not require separate accounting for embedded derivatives.  However, nonfinancial contracts that include an embedded derivative with economic characteristics not closely related to the host contract are accounted for in their entirety at fair value.

In contrast, under U.S. GAAP derivatives embedded in host contracts generally are accounted for separately if they are not clearly and closely related to the host contract.  Nonfinancial contracts that include an embedded derivative that is clearly and closely related to the host contract are accounted for in accordance with GAAP relevant for those host contracts.
12.5 In addition to the contracts described in paragraph 12.4, this section applies to contracts to buy or sell non-financial items if the contract can be settled net in cash or another financial instrument, or by exchanging financial instruments as if the contracts were financial instruments, with the following exception: contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements are not financial instruments for the purposes of this section.  
Initial recognition of financial assets and liabilities 
12.6 An entity shall recognise a financial asset or a financial liability only when the entity becomes a party to the contractual provisions of the instrument.  
Initial measurement
12.7 When a financial asset or financial liability is recognised initially, an entity shall measure it at its fair value, which is normally the transaction price. Derivatives, securities classified as trading or available-for-sale, and instruments for which the fair value option through P&L has been elected are measured initially at fair value.  Unlike IFRS SMEs, other financial instruments are measured initially at cost.
Subsequent measurement
12.8 At the end of each reporting period, an entity shall measure all financial instruments within the scope of Section 12 at fair value and recognise changes in fair value in profit or loss, except as follows: equity instruments that are not publicly traded and whose fair value cannot otherwise be measured reliably, and contracts linked to such instruments that, if exercised, will result in delivery of such instruments, shall be measured at cost less impairment. Fewer financial instruments are measured subsequently at fair value, or at fair value through P&L.  Reasons include—
  • The IFRS SMEs “basic/other” distinction. (e.g, convertible debt does not meet the definition of a basic financial instrument.)
  • GAAP has held-to-maturity and available for sale classifications for financial instruments held as assets.
  • GAAP has specialized industry practices.
12.9 If a reliable measure of fair value is no longer available for an equity instrument that is not publicly traded but is measured at fair value through profit or loss, its fair value at the last date the instrument was reliably measurable is treated as the cost of the instrument. The entity shall measure the instrument at this cost amount less impairment until a reliable measure of fair value becomes available.  
Fair value
12.10 An entity shall apply the guidance on fair value in paragraphs 11.27–11.32 to fair value measurements in accordance with this section as well as for fair value measurements in accordance with Section 11.  
12.11 The fair value of a financial liability that is due on demand is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid. Unlike IFRS SMEs, there is no floor on the fair value of a financial liability that is due on demand.
12.12 An entity shall not include transaction costs in the initial measurement of financial assets and liabilities that will be measured subsequently at fair value through profit or loss. If payment for an asset is deferred or is financed at a rate of interest that is not a market rate, the entity shall initially measure the asset at the present value of the future payments discounted at a market rate of interest.  
Impairment of financial instruments measured at cost or amortised cost
12.13 An entity shall apply the guidance on impairment of a financial instrument measured at cost in paragraphs 11.21–11.26 to financial instruments measured at cost less impairment in accordance with this section.  
Derecognition of a financial asset or financial liability
12.14 An entity shall apply the derecognition requirements in paragraphs 11.33–11.38 to financial assets and financial liabilities to which this section applies. See Derecognition of Financial Assets and Derecognition of Financial Liabilities under Basic Financial Instruments.
Hedge Accounting
12.15 If specified criteria are met, an entity may designate a hedging relationship between a hedging instrument and a hedged item in such a way as to qualify for hedge accounting. Hedge accounting permits the gain or loss on the hedging instrument and on the hedged item to be recognised in profit or loss at the same time.  
12.16 To qualify for hedge accounting, an entity shall comply with all of the following conditions:
  1. the entity designates and documents the hedging relationship so that the risk being hedged, the hedged item and the hedging instrument are clearly identified and the risk in the hedged item is the risk being hedged with the hedging instrument.
  2. the hedged risk is one of the risks specified in paragraph 12.17.
  3. the hedging instrument is as specified in paragraph 12.18.
  4. the entity expects the hedging instrument to be highly effective in offsetting the designated hedged risk. The effectiveness of a hedge is the degree to which changes in the fair value or cash flows of the hedged item that are attributable to the hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.
 Qualification for hedge accounting depends on whether the hedged exposure is a fair-value or a cash-flow exposure, or a currency exposure on a net investment in a foreign operation.

Hedge accounting is permitted only if strict documentation, effectiveness testing, and other requirements are met that are much more extensive than IFRS SMEs.
12.17 This IFRS permits hedge accounting only for the following risks:
  1. interest rate risk of a debt instrument measured at amortised cost.
  2. foreign exchange or interest rate risk in a firm commitment or a highly probable forecast transaction.
  3. price risk of a commodity that it holds or in a firm commitment or highly probable forecast transaction to purchase or sell a commodity.
  4. foreign exchange risk in a net investment in a foreign operation.
Foreign exchange risk of a debt instrument measured at amortised cost is not in the list above because hedge accounting would not have any significant effect on the financial statements. Basic accounts, notes and loans receivable and payable are normally measured at amortised cost (see paragraph 11.5(d)). This would include payables denominated in a foreign currency. Paragraph 30.10 requires any change in the carrying amount of the payable because of a change in the exchange rate to be recognised in profit or loss. Therefore, both the change in fair value of the hedging instrument (the cross-currency swap) and the change in the carrying amount of the payable relating to the change in the exchange rate would be recognised in profit or loss and should offset each other except to the extent of the difference between the spot rate (at which the liability is measured) and the forward rate (at which the swap is measured).		 Risks beyond those identified in IFRS SMEs, e.g., credit risk, can qualify for hedge accounting.

Unlike IFRS SMEs, hedge accounting for portfolios is permitted.
12.18 This IFRS permits hedge accounting only if the hedging instrument has all of following terms and conditions:
  1. it is an interest rate swap, a foreign currency swap, a foreign currency forward exchange contract or a commodity forward exchange contract that is expected to be highly effective in offsetting a risk identified in paragraph 12.17 that is designated as the hedged risk.
  2. it involves a party external to the reporting entity (ie external to the group, segment or individual entity being reported on).
  3. its notional amount is equal to the designated amount of the principal or notional amount of the hedged item.
  4. it has a specified maturity date not later than
    1. the maturity of the financial instrument being hedged,
    2. the expected settlement of the commodity purchase or sale commitment, or
    3. the occurrence of the highly probable forecast foreign currency or commodity transaction being hedged.
  5. it has no prepayment, early termination or extension features.
 U.S. GAAP permits a broader range of hedging instruments, e.g., debt instruments (for currency exposure of a net investment in foreign operations) and options, if the criteria, including effectiveness, are met. 
Hedge of fixed interest rate risk of a recognised financial instrument or commodity price risk of a commodity held
12.19 If the conditions in paragraph 12.16 are met and the hedged risk is the exposure to a fixed interest rate risk of a debt instrument measured at amortised cost or the commodity price risk of a commodity that it holds, the entity shall:
  1. recognise the hedging instrument as an asset or liability and the change in the fair value of the hedging instrument in profit or loss, and
  2. recognise the change in the fair value of the hedged item related to the hedged risk in profit or loss and as an adjustment to the carrying amount of the hedged item.
  
12.20 If the hedged risk is the fixed interest rate risk of a debt instrument measured at amortised cost, the entity shall recognise the periodic net cash settlements on the interest rate swap that is the hedging instrument in profit or loss in the period in which the net settlements accrue.  
12.21 The entity shall discontinue the hedge accounting specified in paragraph 12.19 if:
  1. the hedging instrument expires or is sold or terminated;
  2. the hedge no longer meets the conditions for hedge accounting specified in paragraph 12.16; or
  3. the entity revokes the designation.
  
12.22 If hedge accounting is discontinued and the hedged item is an asset or liability carried at amortised cost that has not been derecognised, any gains or losses recognised as adjustments to the carrying amount of the hedged item are amortised into profit or loss using the effective interest method over the remaining life of the hedged instrument.  
Hedge of variable interest rate risk of a recognised financial instrument, foreign exchange risk or commodity price risk in a firm commitment or highly probable forecast transaction, or a net investment in a foreign operation
12.23 If the conditions in paragraph 12.16 are met and the hedged risk is
  1. the variable interest rate risk in a debt instrument measured at amortised cost,
  2. the foreign exchange risk in a firm commitment or a highly probable forecast transaction,
  3. the commodity price risk in a firm commitment or highly probable forecast transaction, or
  4. the foreign exchange risk in a net investment in a foreign operation,
the entity shall recognise in other comprehensive income the portion of the change in the fair value of the hedging instrument that was effective in offsetting the change in the fair value or expected cash flows of the hedged item. The entity shall recognise in profit or loss any excess of the fair value of the hedging instrument over the change in the fair value of the expected cash flows (sometimes called hedge ineffectiveness). The hedging gain or loss recognised in other comprehensive income shall be reclassified to profit or loss when the hedged item is recognised in profit or loss or when the hedging relationship ends.		  
12.24 If the hedged risk is the variable interest rate risk in a debt instrument measured at amortised cost, the entity shall subsequently recognise in profit or loss the periodic net cash settlements from the interest rate swap that is the hedging instrument in the period in which the net settlements accrue.  
12.25 The entity shall discontinue the hedge accounting specified in paragraph 12.23 if:
  1. the hedging instrument expires or is sold or terminated;
  2. the hedge no longer meets the criteria for hedge accounting in paragraph 12.16;
  3. in a hedge of a forecast transaction, the forecast transaction is no longer highly probable; or
  4. the entity revokes the designation.
If the forecast transaction is no longer expected to take place or if the hedged debt instrument measured at amortised cost is derecognised, any gain or loss on the hedging instrument that was recognised in other comprehensive income shall be reclassified from other comprehensive income to profit or loss.		  
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