Key Differences from US GAAP
While the FASB continues to move forward with their technical updates to ASC815, the ultimate goal, as reflected in many of the proposed changes, will be convergence with the IAS39 (SEC set final vote on convergence for 2011). A recent PWC survey found that 15% of US companies are already reporting under IFRS, with an additional 75% already beginning to explore the impact of IFRS adoption. Wherever your company stands in this process, it is important to begin to understand some of the fundamental differences between IFRS and US GAAP. Under IFRS:
- Definition of a derivative requires no net settlement feature and no notional amount. The instrument need only have a value that changes in response to changes in underlying variables, require little or no initial net investment and be settled at a future date.
- Fair value is the amount at which an asset could be exchanged or a liability settled between knowledgeable willing parties – i.e. bid price for assets and ask price for liabilities, rather than mid- market pricing.
- Credit considered only in the pricing of assets, not liabilities, although this issue is currently under consideration.
- Benchmark hedging not limited to Treasuries and LIBOR.
- No documentation requirements surrounding normal purchase/normal sale, called “Own Use” contracts.
- No matched terms or short-cut assumptions.
- An entity cannot include option time value (a la G20) in hedged item for effectiveness purposes.
- Forecast transaction must be “highly probable” to occur under IFRS v. “probable” under US GAAP.
- Hedge Period: “a reasonably specific and narrow range of time” (No two month rule or DIG G16 accommodations).
- Parent can execute cash flow and net investment hedges on behalf of subsidiary regardless of functional currency.
- Allows basis adjustments to non-financial assets/liabilities rather than amortization of gain/loss from OCI for cash flow hedges, i.e. Fixed assets, inventory, deferred revenue.
- Non-financial instruments, such as cash, can be used as cash flow currency hedging instruments.
Hedge Trackers is currently outsourcing accounting for several companies reporting under IFRS, as well as advising others on the implications of making the transition. Please let us know if we can assist you in moving forward with this process, or just providing more basic background information.
