Chapter 10 — Differences Between U.S. GAAP and IFRS Accounting Standards

10.1 Background

10.1.1 IFRS Guidance

Under IFRS Accounting Standards, an issuer applies IAS 32 to determine whether outstanding shares and other financial instruments should be classified as liabilities (or, in some circumstances, assets) or equity or be separated into liability and equity components. IAS 32 has a broader scope than does ASC 480. For example, IAS 32 addresses the accounting for convertible debt instruments, contracts on the entity’s own equity that do not embody obligations of the issuer (e.g., purchased put or call options on the entity’s own equity), and contracts that embody obligations to transfer a fixed number of the issuer’s equity shares but do not require the issuer to transfer assets or a variable number of equity shares (e.g., written call options, warrants, and forward sale contracts on the entity’s own equity). The discussion of key differences below applies only to contracts within the scope of ASC 480. 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 contracts on an entity’s own equity that are within the scope of ASC 815-40.

10.1.2 Key Differences

The table below summarizes key differences between U.S. GAAP and IFRS Accounting Standards in the accounting for outstanding equity shares and other financial instruments that are within the scope of ASC 480 (including the SEC’s temporary equity guidance in ASC 480-10-S99-3A). The table is followed by a detailed explanation of each difference.

	U.S. GAAP	IFRS Accounting Standards
Redeemable equity securities	Financial instruments in the form of shares that embody an obligation to transfer assets are classified as liabilities only if the obligation is unconditional and the transfer of assets is therefore certain to occur. SEC registrants present equity-classified instruments that embody a conditional obligation to transfer assets as temporary equity.	Financial instruments in the form of shares that embody an obligation to transfer assets are classified as liabilities irrespective of whether the obligation is unconditional or conditional, with certain exceptions.
Obligations to repurchase shares	Physically settled forward-purchase contracts that embody an obligation to repurchase a fixed number of the issuer’s equity shares for cash are accounted for at either the present value of the redemption amount or the settlement value. Other physically settled contracts that embody an obligation to repurchase the issuer’s equity shares by transferring assets (e.g., a physically settled written put option or a forward purchase contract that provides the counterparty with a right to require either physical or net settlement) are accounted for at fair value.	Contracts that embody an obligation to repurchase the issuer’s equity shares by transferring assets are accounted for at the present value of the redemption amount if the issuer could be required to physically settle the contract by transferring assets in exchange for shares (e.g., a forward purchase or written put option contract that gives the counterparty the right to require either physical or net settlement).
Obligations to issue a variable number of equity shares	A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by delivering a variable number of equity shares is classified as an asset or a liability if, at inception, the obligation’s monetary value is based either solely or predominantly on a fixed monetary amount, variations in something other than the fair value of the issuer’s equity shares, or variations inversely related to changes in the fair value of the issuer’s equity shares.	Contracts that will be settled in a variable number of shares are accounted for as assets or liabilities.

10.2 Redeemable Equity Securities

Both U.S. GAAP and IFRS Accounting Standards require financial instruments issued in the legal form of shares that embody an unconditional obligation that requires the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur to be accounted for as liabilities (see Section 4.1 and paragraph 16 of IAS 32).

Under U.S. GAAP, financial instruments issued in the form of shares that embody a conditional obligation that could require the issuer to redeem the instrument generally are classified as equity because they are outside the scope of the liability classification guidance in ASC 480. The definition of mandatorily redeemable financial instruments (which must be classified as financial liabilities) in ASC 480-10-20 is limited to unconditional obligations. Therefore, outstanding shares that could be redeemed at the option of the holder, or upon some contingent event, generally are not classified as financial liabilities under ASC 480. Under U.S. GAAP, mandatorily redeemable equity securities that are not certain to be redeemed (e.g., those containing an equity conversion option that permits the securities to be converted into nonredeemable equity securities before the mandatory redemption date) are also classified as equity. If redemption becomes certain to occur, the securities would be reclassified, and accounted for, as a liability. ASC 480-10-S99-3A indicates that when an equity instrument has a redemption feature that is not solely within the control of the issuer, an SEC registrant is required to present the instrument on the balance sheet between permanent equity and liabilities in a section labeled “temporary equity” or “mezzanine equity” (see Chapter 9).

Under IFRS Accounting Standards, an instrument should be accounted for as a liability if it gives the holder the right to put the instrument back to the issuer for cash or another financial asset (e.g., redeemable preferred shares) or is automatically put back to the issuer upon the occurrence of an uncertain future event (e.g., contingently mandatorily redeemable shares). Accordingly, there is no concept of “temporary equity” under IFRS Accounting Standards. Paragraph 18(b) of IAS 32 notes that the conditional redemption obligation creates a contractual obligation for the issuer to deliver cash or another financial asset. Paragraph 19(b) of IAS 32 states that the fact that a contractual obligation is conditional upon the holder’s exercising its right to require redemption does not negate the existence of a financial liability since the issuer “does not have the unconditional right to avoid delivering cash or another financial asset.” ASC 480 does not require conditionally redeemable shares to be classified as liabilities.

Under IAS 32, the issuer is exempt, in limited circumstances, from the liability classification requirement for puttable financial instruments. Specifically, IAS 32 requires that puttable instruments be presented as equity if the following four criteria are met:

The holder is entitled “to a pro rata share of the entity’s net assets [at] liquidation.”
“The instrument is in the class of instruments that is [the most] subordinate” and all instruments in that class are identical.
The instrument has no other characteristics that would meet the definition of a financial liability.
“The total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity.”

Under IFRS Accounting Standards, instruments, or components of instruments, that obligate the entity to deliver a pro rata share of the net assets of the entity only on liquidation should be presented as equity if they meet criteria (1) and (2) above. See paragraphs 16A through 16D of IAS 32 for additional information.

10.3 Obligations to Repurchase Shares

10.3.1 Forward Purchase Contracts on an Entity’s Own Equity

Under U.S. GAAP, a forward purchase contract on an entity’s own shares that is within the scope of ASC 480 is classified as a liability. If the forward contract requires physical settlement by repurchase of a fixed number of shares for cash, the contract is measured at the present value of the amount to be paid at settlement or settlement value (see Section 5.3.1). If the forward contract will be net share settled or net cash settled (or either party has the ability to elect net-cash or net-share settlement), however, the contract is accounted for at fair value, with changes in fair value recognized in earnings (see Sections 5.3.2 and 6.3).

Under IFRS Accounting Standards, paragraph 23 of IAS 32 requires a physically settled forward-purchase contract on an entity’s own shares to be accounted for as a liability at the present value of the redemption amount. This treatment applies if the issuer could be required to settle the contract by a gross exchange of cash for shares even if the holder has the right to elect net-cash or net-share settlement (i.e., it applies when the holder has the choice of settling the contract gross by the exchange of either cash or another financial asset for shares). Such treatment differs from the guidance in ASC 480 under which fair value accounting is required when an ASC 480 liability may be net share settled or net cash settled. Therefore, under IAS 32, the class of instruments measured at the present value of the redemption amount is broader.

10.3.2 Written Put Options on an Entity’s Own Equity

Under U.S. GAAP, a written put option on an entity’s own shares is accounted for as a liability at fair value, with changes in fair value recognized in earnings (see Sections 5.3.1 and 6.3).

Under IFRS Accounting Standards, paragraph 23 of IAS 32 requires a physically settled written put option on an entity’s own shares to be accounted for in a manner similar to a physically settled forward-purchase contract on the entity’s own equity (see Section 10.3.1); that is, as a liability at the present value of the redemption amount. This treatment applies if the issuer could be required to settle the contract by a gross exchange of cash for shares even if the holder has the right to elect net-cash or net-share settlement (i.e., it applies when the holder has the choice of settling the contract gross by the exchange of either cash or another financial asset for shares).