Differences Between U.S. FAS 133 and International IAS 39 Hedge Accounting Standards
Including Comments on Canadian Hedge Accounting  in Relation to FAS 133 and IAS 39
Bob Jensen at Trinity University 

Sometime around 2010, Canada will cease to have a unique set of accounting principles which have generally been very close to U.S. GAAP.  Canada will move to international IASB standards now used in Europe and many other parts of the world.  The U.S. is working closely with the IASB toward the same goal, but in countries like the U.S. and China, the progress will be much slower until the IASB standards tighten up on various types of contracting.
See http://www.theglobeandmail.com/servlet/story/LAC.20060111.RGAAP11/BNPri

Bob Jensen's threads and tutorials on hedge accounting are at http://www.trinity.edu/rjensen/caseans/000index.htm 

Bob Jensen's glossary on derivative financial instruments and hedge accounting is at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm 

The following Ernst & Young document provides a nice summary of revisions.
"IAS 32 and IAS 39 Revised:  An Overview," Ernst & Young, February 2004  --- http://www.ey.com/global/download.nsf/International/IAS32-39_Overview_Febr04/$file/IAS32-39_Overview_Febr04.pdf 
I shortened the above URL to http://snipurl.com/RevisedIAS32and39 

One of the differences that I have to repeatedly warn my students about is the fact that Other Comprehensive Income (OCI)  is generally converted to current earnings when the derivative hedging contract is settled on a cash flow hedge (this conversion is usually called basis adjustment). For example, if I hedge a forecasted purchase of inventory, I will use OCI during the cash flow hedging period, but when I buy the inventory, IAS 39 says to covert the OCI to current earnings. (Actually, IAS standards do not admit to an "Other Comprehensive Income" (OCI) account, but they recommend what is tantamount to using OCI in the equity section of the balance sheet.)

Under FAS 133, basis adjustment is not permitted under many circumstances when derivatives are settled. In the example above, FAS 133 requires that OCI be carried forward after the inventory is purchased and the derivative is settled. OCI is subsequently converted to earnings in a piecemeal fashion. For example, if 20% of the inventory is sold, 20% of the OCI balance at the time the derivative is settled is then converted to current earnings. I call this deferred basis adjustment under FAS 133. This is also true of a cash flow hedge of AFS investment. OCI is carried forward until the investment is sold.  See "Basis Adjustment" at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#B-Terms 

Initially, it portfolio (macro) hedges were not afforded any hedge accounting relief unless the portfolios were completely homogeneous with respect to each item in a portfolio.  In practice, the result was to virtually not allow hedge accounting on macro hedges.  Although the International Accounting Standards Board is close to a revision that will allow limited macro hedging (mostly for banks) under IAS 39, the macro hedging dispute between companies and standard setters is unresolved.  See "Macro Hedge" at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#M-Terms 

The for-free IASC comparison study of IAS 39 versus FAS 133 (by Paul Pacter) at http://www.iasc.org.uk/news/cen8_142.htm

The non-free FASB comparison study of all standards entitled The IASC-U.S. Comparison Project: A Report on the Similarities and Differences between IASC Standards and U.S. GAAP
SECOND EDITION, (October 1999) at http://stores.yahoo.com/fasbpubs/publications.html 

In 1999 the Joint Working Group of the Banking Associations sharply rebuffed the IAS 39 fair value accounting in two white papers that can be downloaded from http://www.iasc.org.uk/frame/cen3_112.htm.

Also see the Financial Accounting Standards Board (FASB) and the International Federation of Accountants Committee (IFAC).

Side by Side: IAS 39 Compared with FASB Standards (FAS 133), by Paul Pacter, as published in Accountancy International Magazine, June 1999 --- http://www.iasc.org.uk/news/cen8_142.htm 
Also note "Comparisons of International IAS Versus FASB Standards" --- http://www.deloitte.com/dtt/cda/doc/content/pocketiasus.pdf

Updated in 2005:  Some Key Differences Between IFRs and U.S. GAAP --- http://www.iasplus.com/usa/ifrsus.htm

IAS 39 Option to designate any financial asset or financial liability to be measured at fair value through profit or loss ('fair value option')
  • IFRS: Option is allowed.
  • US: No such option.
  • Status: This option was added in the December 2003 revisions to IAS 39.

IAS 39 Option to designate loans and receivables as available for sale to be measured at fair value through equity ('available-for-sale option')

  • IFRS: Option is allowed.
  • US: No such option.
  • Status: This option was added in the December 2003 revisions to IAS 39.

IAS 39 Investments in unlisted equity instruments

  • IFRS: Measured at fair value if reliably measurable; otherwise at cost.
  • US: Measured at cost.
  • Status: Not currently being addressed.

IAS 39 Measurement of derivatives

  • IFRS: All derivatives are measured at fair value except that a derivative that is linked to and must be settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured is measured at cost.
  • US: All derivatives are measured at fair value (though the definition of a derivative is not identical to that of IAS 39).
  • Status: Not currently being addressed.

IAS 39 Multiple embedded derivatives in a single hybrid instrument

  • IFRS: Sometimes accounted for separately.
  • US: Always treated as a single compound embedded derivative.
  • Status: Not currently being addressed.

IAS 39 Reclassification of financial instruments into or out of the trading category

  • IFRS: Prohibited.
  • US: Permitted, but generally transfers into or from the trading category should be rare.
  • Status: Not currently being addressed.

IAS 39 Effect of selling investments classified as held-to-maturity

  • IFRS: Prohibited from using held-to-maturity classification for the next two years.
  • US: Prohibited from using held-to-maturity classification. SEC indicates that prohibition is generally for two years.
  • Status: Not currently being addressed.

IAS 39 Subsequent reversal of an impairment loss

  • IFRS: Required for loans and receivables, held-to-maturity, and available-for-sale debt instruments if certain criteria are met.
  • US: Prohibited for held-to-maturity and available-for-sale securities. Reversal of valuation allowances on loans is recognised in the income statement.
  • Status: Not currently being addressed.

IAS 39 Derecognition of financial assets

  • IFRS: Combination of risks and rewards and control approach. Can derecognise part of an asset. No "isolation in bankruptcy" test. Partial derecognition allowed only if specific criteria are complied with.
  • US: Derecognise assets when transferor has surrendered control over the assets. One of the conditions is legal isolation in bankruptcy. No partial derecognition.
  • Status: This is a subject that both Boards are likely to address in the future.

IAS 39 Use of "Qualifying SPEs"

  • IFRS: No such category of SPEs.
  • US: Necessary for derecognition of financial assets if transferee is not free to sell or pledge transferred assets.
  • Status: This is a subject that both Boards are likely to address in the future.

IAS 39 Offsetting amounts due from and owed to two different parties

  • IFRS: Required if legal right of set-off and intent to settle net.
  • US: Prohibited.
  • Status: Not currently being addressed.

IAS 39 Use of "partial-term hedges" (hedge of a fair value exposure for only a part of the term of a hedged item)

  • IFRS: Allowed.
  • US: Prohibited.
  • Status: Not currently being addressed.

IAS 39 Hedging foreign currency risk in a held-to-maturity investment

  • IFRS: Can qualify for hedge accounting.
  • US: Cannot qualify for hedge accounting.
  • Status: Not currently being addressed.

IAS 39 Hedging foreign currency risk in a firm commitment to acquire a business in a business combination

  • IFRS: Can qualify for hedge accounting.
  • US: Cannot qualify for hedge accounting.
  • Status: Not currently being addressed.

IAS 39 Assuming perfect effectiveness of a hedge if critical terms match

  • IFRS: Prohibited. Must always measure effectiveness.
  • US: Allowed for hedge of interest rate risk in a debt instrument if certain conditions are met – "Shortcut Method".
  • Status: Not currently being addressed.

IAS 39 Use of "basis adjustment"

  • IFRS:
    Fair value hedge: Required.
    Cash flow hedge of a transaction resulting in a financial asset or liability: Same as US GAAP.
    Cash flow hedge of a transaction resulting in a non-financial asset or liability: Choice of US GAAP or basis adjustment.
  • US:
    Fair value hedge: Required.
    Cash flow hedge of a transaction resulting in an asset or liability: Gain/loss on hedging instrument that had been reported in equity remains in equity and is reclassified into earnings in the same period the acquired asset or incurred liability affects earnings.
  • Status: Not currently being addressed.

IAS 39 Hedging gain or loss on net investment in a foreign entity

  • IFRS: The portion determined to be an effective hedge is recognised in equity.
  • US: Gains and losses relating to hedge ineffectiveness is recognised in profit or loss immediately.
  • Status: Not currently being addressed.

IAS 39 Macro hedging

  • IFRS: Fair value hedge accounting treatment for a portfolio hedge of interest rate risk is allowed if certain specified conditions are met.
  • US: Hedge accounting treatment is prohibited, though similar results may be achieved by designating specific assets or liabilities as hedged items.
  • Status: FASB does not have a project to address macro hedging.
Fair value accounting politics in the revised IAS 39

From Paul Pacter's IAS Plus on July 13, 2005 --- http://www.iasplus.com/index.htm

 
The European Commission has published Frequently Asked Questions – IAS 39 Fair Value Option (FVO) (PDF 94k), providing the Commission's views on the following questions:
  • Why did the Commission carve out the full fair value option in the original IAS 39 standard?
  • Do prudential supervisors support IAS 39 FVO as published by the IASB?
  • When will the Commission to adopt the amended standard for the IAS 39 FVO?
  • Will companies be able to apply the amended standard for their 2005 financial statements?
  • Does the amended standard for IAS 39 FVO meet the EU endorsement criteria?
  • What about the relationship between the fair valuation of own liabilities under the amended IAS 39 FVO standard and under Article 42(a) of the Fourth Company Law Directive?
  • Will the Commission now propose amending Article 42(a) of the Fourth Company Directive?
  • What about the remaining IAS 39 carve-out relating to certain hedge accounting provisions?

Bob Jensen's threads and tutorials on FAS 133 and IAS 39 are at http://www.trinity.edu/rjensen/caseans/000index.htm

IAS 39 Implementation Guidance

IAS 39 Amendments in 2005 --- http://snipurl.com/IAS39amendments

 

Side by Side: IAS 39 Compared with FASB Standards (FAS 133), by Paul Pacter, as published in Accountancy International Magazine, June 1999.  He discusses these at http://www.trinity.edu/rjensen/acct5341/speakers/pacter.htm 


Also note "Comparisons of International IAS Versus FASB Standards" --- http://www.deloitte.com/dtt/cda/doc/content/pocketiasus.pdf

 
GAAP Differences in Your Pocket:  IAS and US GAAP
http://www.deloitte.com/dtt/cda/doc/content/pocketiasus.pdf 
Topic IAS 39 from the IASB FAS 133 from the FASB
Change in value of non-trading investment Recognize either in net profit or loss or in equity (with recycling). 
May be changed in IAS 39 Amendments.		 Recognize in equity (with recycling).
Accounting for hedges of a firm commitment Cash flow hedge. 
May be changed in IAS 39 Amendments.		 Fair value hedge.
Use of partial-term hedges Allowed.  Prohibited.
Effect of selling investments classified as held-to-maturity Prohibited from using held-to- maturity classification for the next two years. Prohibited from using held-to- maturity classification (no two year limit).
Use of "basis adjustment" Gain/loss on hedging instrument that had been reported in equity becomes an adjustment of the carrying amount of the asset.
May be changed in IAS 39 Amendments.		 Gain/loss on hedging instrument that had been reported in equity remains in equity and is amortized over the same period as the asset.
 Derecognition of financial assets No "isolation in bankruptcy" test.
May be changed in IAS 39 Amendments.
May be changed in IAS 39 Amendments.		 Derecognition prohibited unless the transferred asset is beyond the reach of the transferor even in bankruptcy.
Subsequent reversal of an impairment loss Required, if certain criteria are met
May be changed in IAS 39 Amendments.		 Prohibited.
Use of "Qualifying SPEs" Prohibited. Allowed.

 

When seeking out the Canadian Chartered Accountants rules for accounting for derivative financial instruments and hedge accounting, a good place to start is the Guideline 13 (AcG-13) on Hedging Relationships from the Canadian Institute of Chartered Accountants --- http://www.cica.ca/index.cfm/ci_id/17150/la_id/1.htm 

Summary of AcSB roundtable discussions of March 2003 proposals --- http://www.cica.ca/multimedia/Download_Library/Standards/Accounting/English/e_FIRoundtable.pdf 

March 2003 Exposure Draft on Hedges --- http://www.cica.ca/multimedia/Download_Library/Standards/Accounting/English/e_HedgingIG1.pdf 

Information Services Officer
Standards Group
The Canadian Institute of Chartered Accountants
277 Wellington Street West Toronto, Ontario M5V 3H2
Fax: (416) 204-3412

The Accounting Standards Board proposes, subject to comments received following exposure, to issue three new Handbook Sections, FINANCIAL INSTRUMENTS — RECOGNITION AND MEASUREMENT, Section 3855, HEDGES, Section 3865, and COMPREHENSIVE INCOME, Section 1530. These Exposure Drafts should be read in conjunction with the accompanying Background Information and Basis for Conclusions documents.

The Exposure Drafts:

• specify when a financial instrument or non-financial derivative is to be recognized on the balance sheet;
• require a financial instrument or non-financial derivative to be measured at fair value, amortized cost, or cost;
• establish how gains and losses are to be recognized and presented, including introducing comprehensive income;
• specify how hedge accounting should be applied;
• establish new disclosures about an entity’s accounting for designated hedging relationships and the methods and assumptions applied in determining fair values; and
• modify SURPLUS, Section 3250, to bring it more up to date.

The Exposure Drafts apply to all entities, including not-for-profit organizations and those entities qualifying for differential reporting.

 

Implementation Guide on Hedging Relationships  http://www.cica.ca/multimedia/Download_Library/Standards/Accounting/English/e_HedgingIG1.pdf 

 

February 3, 2004 message from Don Carter [carter@casb.com]

Hi Bob:

Good to hear from you! I'm glad to see that you are still sharing your expertise in these complex issues even in retirement. I wish your presentation was in Vancouver rather than Calgary so that I could get to visit with you.

How's the new home and how did you survive the winter, which I hear was somewhat severe in your neck of the woods? You may have had some moments when you wished you were back in Texas?

We continue with implementation of improvements to our program as recommended in your review and have just completed our first offering of three new "focus" modules - one in Valuation, one in Tax and one in IT (Systems Reliability).

Rather than give you my somewhat superficial understanding of the differences in hedge accounting rules, I forwarded your request to a friend at the CICA Accounting Standards Board. I am forwarding his reply which I hope will give you all the information you require and it is "right from the horse's mouth".

Warm personal regards,

Don.

Dr. Don Carter, FCA
VP Learning
CA School of Business - Learning Centre
Suite 500, One Bentall Centre
505 Burrard Street, Box 22
Vancouver, BC V7X 1M4
 E-mail: carter@casb.com  Website: www.casb.com

The following is a list of a number of the differences between IAS 39 and FAS 133 - it is not comprehensive. In addition, please note that the macrohedging proposal is not yet approved by IASB. Some of these differences have been eliminated in the Canadian material, but not all. [Comments on the Canadian position are based on the latest AcSB deliberations - not yet approved, but in some cases different from the March 2003 EDs]

The basic hedge accounting model in IAS 39 is similar to US GAAP, which specifies the same basic types of hedges - fair value hedges, cash flow hedges and hedges of net investments, and accounts for them in similar manners. Most of the differences are in the details as to what qualifies for hedge accounting. The following summarizes some of the most significant differences.

(a) Non-derivatives may be designated as hedges of any foreign currency risk in accordance with IAS 39. Non-derivatives may be designated as hedging instruments only for fair value hedges of foreign currency risk in unrecognized firm commitments and net investments in foreign operations in accordance with US GAAP. [Canada as IAS 39]

(b) Hedging of prepayment risk in a held-to-maturity investment is precluded in accordance with IAS 39. Hedge accounting is permitted for the overall fair value of a prepayment option in accordance with US GAAP. [Canada as US]

(c) A portion of an anticipated transaction may be designated as a hedged item in accordance with IAS 39. However, US GAAP does not permit such designation. [Canada as IAS 39]

(d) IAS 39 permits hedging of foreign exchange risk relating to an anticipated business combination. US GAAP does not permit hedge accounting of foreign exchange risk in these circumstances. [Canada as IAS 39]

(e) IAS 39 does not permit a "shortcut" method for assuming no ineffectiveness in certain hedges of interest rate risk using interest rate swaps, which is available in accordance with US GAAP. [Canada as US]

(f) The definition of a firm commitment in IAS 39, while very similar to that in US GAAP is slightly less extensive. Although the first parts of the definitions are very similar, the FASB definition adds additional criteria. Therefore, there is a possibility that a particular circumstance would qualify as a cash flow hedge in accordance with IAS 39 while qualifying as a fair value hedge in accordance with US GAAP, or vice versa. [Canada as US]

(g) IAS 39 does not appear to prohibit designation of an embedded derivative that is clearly and closely related to the host contract as the hedged item. FASB Statement 133 permits designating an embedded derivative as the hedged item in a fair value hedge only if it is a put option, call option, interest rate cap, or interest rate floor embedded in an existing asset or liability that is not an embedded derivative accounted for separately. If the entire asset or liability is an instrument with variable cash flows, FASB Statement 133 expressly prohibits the hedged item from being an implicit fixed-to-variable swap (or similar instrument) perceived to be embedded in a host contract with fixed cash flows. This does not create an impediment to complying with US GAAP, since a company that also wishes to comply with US GAAP could choose not to designate any such items as hedged items. [Canada as IAS 39]

(h) IAS 39 does not permit a company to hedge separately changes in the fair value of a recognized loan servicing right or a non-financial firm commitment with financial components due to interest rate risk, credit risk or foreign currency risk, because these items are non-financial in nature. US GAAP specifically permits these exposures to be hedged notwithstanding their non-financial nature. [Canada as US]

(i) FASB Statement 133 requires additional disclosures about hedge accounting that are not included in IAS 39. [Canada as US]