Chapter 8 — Differences Between U.S. GAAP and IFRS Accounting Standards

8.4 Embedded Features

8.4.1 Separation of Embedded Derivatives

While both U.S. GAAP and IFRS Accounting Standards contain requirements about separation of embedded derivatives, they define a derivative differently. Unlike that under ASC 815, the definition of a derivative under IFRS Accounting Standards does not include a requirement for net settlement. Therefore, the accounting for an equity-linked feature that is embedded in a host liability and does not qualify as equity under IAS 32 and ASC 815-40 may differ depending on whether the feature meets the net settlement characteristic in the definition of a derivative under ASC 815. If the liability is not accounted for at fair value with changes in fair value recognized in net income, an embedded feature that neither qualifies as equity nor meets the net settlement characteristic (e.g., because it involves physical settlement in private company stock) would be separated from its host contract and accounted for as a derivative at fair value under IFRS Accounting Standards but not under U.S. GAAP.

8.4.2 Separation of Equity Components

Under IFRS Accounting Standards, if a liability contains a component that qualifies as equity in IAS 32 (e.g., an equity conversion feature embedded in a debt security), that component is always required to be separately recognized in equity by the issuer. Under U.S. GAAP, allocation of an amount to equity is generally precluded when the embedded feature qualifies as equity under ASC 815-40.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.