12.6 Comparison of U.S. GAAP and IFRS Accounting Standards

12.6.1 General

As discussed above, ASC 825 and ASC 815-15 address the FVO under U.S. GAAP. Under IFRS Accounting Standards, IFRS 9 is the primary source of guidance on the election of and accounting for the FVO. The FVO under U.S. GAAP is similar to the FVO under IFRS 9. Like U.S. GAAP, IFRS Accounting Standards permit election of the FVO for certain financial assets and financial liabilities under specific circumstances. Under both U.S. GAAP and IFRS 9, election of the FVO:

May be made at initial recognition.
Is generally irrevocable.
Causes recognition of changes in fair value in earnings and OCI, as applicable.
Requires 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 differences between U.S. GAAP and IFRS Accounting Standards with respect to the FVO and is followed by a detailed explanation of each difference.15

Subject	U.S. GAAP	IFRS Accounting Standards
Scope and qualifying criteria	Entities may elect the FVO for most financial assets and financial liabilities; the 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, but only 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 (see Section 12.3.2).	Entities may elect the FVO at initial recognition of a financial instrument. For financial instruments that represent credit exposures, the FVO may be elected 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 instrument-specific credit risk through OCI. The balance in accumulated 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.

12.6.2 Scope and Qualifying Criteria

12.6.2.1 Scope

The items to which the FVO can be applied under U.S. GAAP are similar to those under IFRS 9. In both cases, the FVO can be applied to financial assets and financial liabilities that are not otherwise outside the scope of the guidance. Neither U.S. GAAP nor IFRS 9 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, and (4) financial instruments classified in shareholders’ equity.

However, because the scope of U.S. GAAP guidance on the FVO differs from that of IFRS 9 in certain respects, election of the FVO is not always permitted for the same items. For example, under U.S. GAAP, an entity is permitted to elect 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, an entity can apply the FVO to equity method investments under U.S. GAAP. With limited exceptions, equity method investments (referred to as “associates”) are outside the scope of the FVO under IFRS 9.

12.6.2.2 Qualifying Criteria

IFRS 9 requires entities to meet certain qualifying criteria before they can elect the FVO for an otherwise eligible item; there are no such qualifying criteria in U.S. GAAP. 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:

Financial assets — 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.”
Financial liabilities — 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, 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 is met:

“[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.”

Moreover, 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 U.S. GAAP, 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.” See further discussion in Section 12.3.1.1.3.

12.6.3 Election Dates

Both U.S. GAAP and IFRS 9 permit the election of the FVO at initial recognition. Unlike the election under IFRS 9, the election under U.S. GAAP can also 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). Under U.S. GAAP, the FVO can also be elected upon the occurrence of certain other qualifying events, including remeasurement events. See further discussion in Section 12.3.2.

IFRS 9 also permits the election of the FVO for financial instruments to the extent that 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 of certain ASUs issued by the FASB may allow one-time FVO elections (see Section 12.3.2.1). In addition, other standards in U.S. GAAP may allow entities to make elections to account for certain items at fair value through earnings after initial recognition and in the absence of a remeasurement event.

12.6.4 Presentation of Fair Value Changes of Financial Liabilities

Under both U.S. GAAP and IFRS Accounting Standards, 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 U.S. GAAP and IFRS Accounting Standards require that the fair value change associated with the liability’s credit risk be recognized in OCI.

However, unlike U.S. GAAP, 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.”

Under U.S. GAAP, upon derecognition of a liability for which fair value changes attributable to the liability’s credit risk have been recognized through OCI, the credit risk component must be released through earnings upon derecognition of the financial liability (see Section 12.4.1.2.4). However, under IFRS Accounting Standards, an entity is not permitted to subsequently release the AOCI component into earnings (or profit or loss) upon derecognition of the liability.

Footnotes

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

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