Chapter 9 — Comparison of U.S. GAAP and IFRS Accounting Standards | DART

Chapter 9 — Comparison of U.S. GAAP and IFRS Accounting Standards

9.1 Background

9.1.1 Circumstances in Which an Understanding of IFRS Accounting Standards May Be Relevant

An understanding of the differences between U.S. GAAP and IFRS Accounting Standards in an issuer’s accounting for convertible debt and other transactions within the scope of ASC 470-20 may be relevant for:

U.S. entities that consolidate subsidiaries or other foreign operations that report under IFRS Accounting Standards.
U.S. entities that provide financial statement information to a parent entity that reports under IFRS Accounting Standards.
U.S. entities that negotiate transaction terms for contracts on own equity with entities that report under IFRS Accounting Standards (and vice versa).
Entities that seek to compare their financial statements with those of international competitors.
Foreign entities that report under IFRS Accounting Standards and consolidate subsidiaries or other operations that report under U.S. GAAP.
Foreign entities that report under IFRS Accounting Standards and provide financial statement information to a parent entity that reports under U.S. GAAP.
Investors and other users of financial statements that seek to compare financial statements prepared under U.S. GAAP and IFRS Accounting Standards.
Standard setters and others that consider opportunities to converge accounting requirements.
Parties that participate in discussions of new accounting requirements under U.S. GAAP or IFRS Accounting Standards or that seek to influence the development of new accounting requirements.

9.1.2 IFRS Guidance

Under IFRS Accounting Standards, an issuer applies IAS 32 to determine the classification of convertible securities. In making this determination, the issuer assesses whether an instrument must be separated into liability and equity components. IAS 32 has a broader scope than does ASC 470-20. For example, IAS 32 addresses the accounting for outstanding equity shares and freestanding contracts to purchase or sell the issuer’s equity shares (e.g., warrants, options, and forwards on the entity’s own equity). The discussion of key differences below applies only to contracts within the scope of ASC 470-20.

Connecting the Dots

For a discussion of key differences between U.S. GAAP and IFRS Accounting Standards related to contracts on an entity’s own equity that are within the scope of ASC 815-40, see Chapter 8 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity. For a discussion of key differences between U.S. GAAP and IFRS Accounting Standards related to the accounting for outstanding equity shares and other financial instruments that are within the scope of ASC 480-10 (including the SEC’s guidance on temporary equity in ASC 480-10-S99), see Chapter 10 of Deloitte’s Roadmap Distinguishing Liabilities From Equity.

9.2 Key Differences

The table below summarizes key differences between U.S. GAAP and IFRS Accounting Standards with respect to an issuer’s accounting for convertible debt and other transactions within the scope of ASC 470-20. The table is followed by a detailed explanation of each difference.

	U.S. GAAP	IFRS Accounting Standards
General	An issuer is required to present convertible debt as a liability in its entirety if (1) the equity conversion feature is not bifurcated as an embedded derivative under ASC 815-15, (2) the convertible debt is not within the Cash Conversion subsections of ASC 470-20, and (3) there is no separately recognized equity component that resulted from one of the following: The issuance of the convertible debt instrument at a substantial premium to par. The recognition of a BCF. A modification that increased the fair value of the conversion option. A reclassification of a conversion option that was previously classified as a derivative.	An issuer is required to separate convertible debt into liability and equity components, on the basis of the fair value of the liability component, unless the equity conversion feature must be bifurcated as an embedded derivative.
Convertible debt issued at a substantial premium	There is a rebuttable presumption that the premium associated with convertible debt issued at a substantial premium to par should be presented as equity unless the equity conversion feature is bifurcated as an embedded derivative or the CCF or BCF guidance applies.	There is no special accounting guidance on convertible debt issued at a substantial premium. An issuer is required to separate convertible debt into liability and equity components unless the equity conversion feature must be bifurcated as an embedded derivative.
Convertible debt with CCF	An issuer is required to separate convertible debt with a CCF into liability and equity components unless the equity conversion feature is bifurcated as an embedded derivative. The liability and equity components are separated by using a with-and-without approach on the basis of the fair value of similar nonconvertible debt.	An issuer is required to bifurcate the equity conversion feature in convertible debt with a CCF as an embedded derivative liability.
Convertible debt with noncontingent BCF	An issuer is required to separate convertible debt with a noncontingent BCF into liability and equity components unless (1) the conversion feature must be bifurcated as an embedded derivative or (2) the CCF guidance applies. The equity component is measured at its initial intrinsic value.	There is no special accounting guidance for convertible debt with a noncontingent BCF. An issuer is required to separate convertible debt into liability and equity components unless the equity conversion feature must be bifurcated as an embedded derivative.
Convertible debt with contingent BCF	An issuer is required to recognize a contingent BCF in equity by reallocating an amount from the liability if or when the contingency is triggered unless (1) the conversion feature must be bifurcated as an embedded derivative, (2) the CCF guidance applies, or (3) the issuer has elected a fair value option for the instrument.	There is no special accounting guidance on convertible debt with a contingent BCF. An issuer is required to separate convertible debt into liability and equity components at inception unless the equity conversion feature must be bifurcated as an embedded derivative. An equity component is not remeasured when conversion price contingencies are triggered.
Conversions in accordance with original terms	No gain or loss is recognized on the conversion of traditional convertible debt in accordance with the original terms unless both (1) conversion occurred upon the issuer’s exercise of a call option and (2) the conversion option was not substantive at issuance. Issuers may be required to recognize a gain or loss or an expense upon the conversion of convertible debt subject to the CCF or BCF guidance or, if the conversion feature was not substantive at issuance, upon the issuer’s exercise of a call option. Upon conversion of a convertible debt instrument that has a separate equity component for a reason other than a CCF or BCF, the unamortized discount is recognized immediately as interest expense on that date.	No gain or loss is recognized upon the conversion of convertible debt at maturity in accordance with the original terms.
Extinguishments of convertible debt — allocation of the consideration paid upon redemption or repurchase	Traditional convertible debt — No allocation of the consideration paid. Convertible debt with a CCF — Consideration paid is allocated between the liability and equity components on the basis of the fair value of the liability component. Convertible debt with a BCF — Consideration paid is allocated between the liability and equity components on the basis of the current intrinsic value of the equity component.	Consideration paid is allocated between the liability and equity components on the basis of the fair value of the liability component.
Own-share lending arrangements executed in contemplation of convertible debt issuance or other financing	Special accounting guidance applies to equity-classified own-share lending arrangements executed in contemplation of convertible debt issuance or other financing.	There is no special accounting guidance for such arrangements.

9.3 Separation Into Liability and Equity Components

9.3.1 Traditional Convertible Debt

Under U.S. GAAP, the issuer of convertible debt is precluded from allocating to equity any of the proceeds received upon its issuance (see Chapter 4) if the convertible debt is not within the Cash Conversion subsections of ASC 470-20 and there is no separately recognized equity component that results from (1) the issuance of the convertible debt instrument at a substantial premium to par, (2) the recognition of a BCF, (3) a modification that increased the fair value of the conversion option, or (4) a reclassification of a conversion option that was previously classified as a derivative. If the equity conversion feature fails to satisfy the equity classification conditions in ASC 815-40, it is bifurcated as an embedded derivative only if it meets the bifurcation conditions in ASC 815-15 (including the net settlement characteristic in the definition of a derivative in ASC 815-10).

Under IFRS Accounting Standards, the issuer of a convertible debt instrument must separate it into liability and equity components if the feature meets the equity classification conditions in IAS 32. The issuer separates the instrument into its components by determining the fair value of the liability component and then deducting that amount from the fair value of the instrument as a whole; the residual amount is allocated to the equity component. If the equity conversion feature does not satisfy the equity classification conditions in IAS 32, it is bifurcated as an embedded derivative unless the issuer elects to apply the fair value option to the convertible debt.

The definition of a derivative and the equity classification conditions under U.S. GAAP and IFRS Accounting Standards are not identical. Therefore, depending on the specific facts and circumstances, the assessment of whether an equity conversion option must be separated as an embedded derivative may differ under the two sets of standards (see Chapter 8 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity). Further, the circumstances in which an issuer may elect the fair value option are not the same, although the guidance in both sets precludes application of the fair value option to equity-classified items.

9.3.2 Convertible Debt Issued at a Substantial Premium

Under U.S. GAAP, there is a rebuttable presumption that the premium associated with convertible debt issued at a substantial premium to par should be presented in equity (see Chapter 5) unless the embedded conversion feature must be separated as an embedded derivative under ASC 815-15 or as an equity component under the CCF or BCF guidance in ASC 470-20.

As noted above, under IFRS Accounting Standards, the issuer of a convertible debt instrument must separate it into liability and equity components if the feature meets the equity classification conditions in IAS 32 (see Section 9.3.1). There is no special guidance on convertible debt issued at a substantial premium.

9.3.3 Cash Conversion Features

Under U.S. GAAP, a convertible debt instrument that contains a CCF must be separated into liability and equity components (see Chapter 6) unless the equity conversion feature has to be separated as an embedded derivative under ASC 815-15. The issuer separates the instrument into its components by determining the fair value of the liability component and then deducting that amount from the fair value of the instrument as a whole; the residual amount is allocated to the equity component.

Under IFRS Accounting Standards, an embedded conversion option that can be settled in cash upon conversion fails to meet the conditions for equity classification in IAS 32. Accordingly, an equity conversion feature that is separately presented as an equity component under the CCF guidance in ASC 470-20 would instead be accounted for as an embedded derivative liability under IFRS Accounting Standards unless the issuer elects to apply the fair value option to the convertible debt.

Paragraph B7 of FSP APB 14-1 states, in part:

[B]ecause the requirements for equity classification under U.S. GAAP [ASC 815-40] differ from the requirements for equity classification under IFRS (IAS 32), the [cash conversion] guidance in [ASC 470-20] does not converge with IFRS. In accordance with IAS 32, the conversion option embedded in a convertible debt instrument that may be settled in cash upon conversion (including partial cash settlement) would be bifurcated and accounted for at fair value as a derivative . . . unless the fair value option is elected for the instrument in its entirety. To accomplish convergence in the accounting for instruments within the scope of [the CCF guidance in ASC 470-20], a broad-based reconsideration of [ASC 815-40] would have been necessary, which the Board decided was beyond the scope of this project.

9.3.4 Beneficial Conversion Features

Under U.S. GAAP, a convertible debt instrument that contains a noncontingent BCF must be separated into liability and equity components (see Chapter 7) unless the equity conversion feature has to be separated as an embedded derivative under ASC 815-15 or as an equity component under the CCF guidance in ASC 470-20. The equity component is measured at the intrinsic value of the equity conversion feature. If a convertible debt instrument contains a contingent BCF, the issuer is required to recognize the intrinsic value of the conversion feature in equity if the contingency is triggered, with a corresponding reduction in the debt’s net carrying amount.

As noted above, under IFRS Accounting Standards, the issuer of a convertible debt instrument must separate it into liability and equity components if the feature meets the equity classification conditions in IAS 32 (see Section 9.3.1). There is no special guidance on convertible debt with a BCF. The equity component is not subsequently remeasured even if a contingent conversion feature is triggered or there is a contingent adjustment to the conversion price.

9.4 Derecognition

9.4.1 Conversions in Accordance With an Instrument’s Original Terms

Under U.S. GAAP, an issuer’s accounting for the conversion of a convertible debt instrument into equity shares in accordance with the instrument’s original terms depends on the particular circumstances:

Conversion of a traditional convertible debt instrument that was not separated into liability and equity components under ASC 470-20 — The net carrying amount of the debt is credited to equity to reflect the stock issued; no gain or loss is recognized (see Section 4.5.2) unless (1) the conversion occurred upon the issuer’s exercise of a call option and (2) the conversion option was not substantive at issuance. If the debt became convertible upon the issuer’s exercise of a call option and did not otherwise contain a substantive conversion feature as of its issuance date, debt extinguishment accounting applies (see Section 4.5.3).
Conversion of a convertible debt instrument that was separated into its liability and equity components in accordance with the CCF guidance in ASC 470-20 — A portion of the fair value of the consideration transferred upon conversion is allocated to the extinguishment of the liability component on the basis of the component’s conversion-date fair value (see Section 6.5). Any difference between this amount and the net carrying amount of the extinguished liability component is recognized currently in income.
Conversion of a convertible debt instrument that includes a separately presented BCF under ASC 470-20 — All of the unamortized discount remaining on the conversion date is recognized immediately as interest expense as of that date (see Section 7.6.1).
Conversion of a convertible debt instrument that includes a separate equity component for reasons other than a CCF or BCF — All of the unamortized discount remaining on the conversion date is recognized immediately as interest expense as of that date (see Section 4.5.2.2).

Under IFRS Accounting Standards, as indicated in paragraph AG32 of IAS 32, upon the “conversion of a convertible instrument at maturity, the entity derecognises the liability component and recognises it as equity. The original equity component remains as equity (although it may be transferred from one line item within equity to another). There is no gain or loss on conversion at maturity.” (Under both U.S. GAAP and IFRS Accounting Standards, entities must recognize upon an induced conversion a loss that is equal to the difference between the fair value of the consideration transferred under the revised terms and the fair value of the consideration issuable under the original terms; see Section 4.5.4.)

9.4.2 Extinguishments

Under U.S. GAAP, if an issuer redeems or repurchases traditional convertible debt, it recognizes an extinguishment gain or loss that is equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt (see Section 4.5.5). If the convertible debt is separated into liability and equity components under the CCF guidance in ASC 470-20, the reacquisition price of the extinguished debt is allocated between the liability and equity components on the basis of the extinguishment-date fair value of the liability component (see Section 6.5). If the convertible debt contains a separated BCF, a portion of the reacquisition price equal to the conversion feature’s extinguishment-date intrinsic value is allocated to equity and the remaining amount is allocated to the extinguishment of the debt (see Section 7.6.2). For instruments that are within the scope of the CCF or BCF guidance in ASC 470-20, any difference between the portion of the reacquisition price allocated to the liability component and its net carrying amount is recognized currently in income as an extinguishment gain or loss.

Under IFRS Accounting Standards, in accordance with paragraph AG33 of IAS 32, if an entity redeems or repurchases a convertible instrument before its maturity (without altering the conversion feature), the consideration paid (including any transaction costs) is allocated to the liability and equity components as of the date of the early redemption or repurchase on the basis of the extinguishment-date fair value of the liability component. The entity records a gain or loss in the income statement for any difference between the amount of the consideration allocated to the liability component and the liability component’s carrying amount at that time. The amount of consideration allocated to the equity component is recorded in equity, with no gain or loss recorded.

9.5 Own-Share Lending Arrangement in Connection With a Convertible Debt Issuance

Under U.S. GAAP, there is special guidance on the accounting for equity-classified own-share lending arrangements executed in contemplation of a convertible debt issuance (see Chapter 8). That guidance requires such arrangements to be initially measured at fair value and recognized as an issuance cost, with an offset to APIC. There is no equivalent accounting guidance under IFRS Accounting Standards.