IAS 39 Compared with FASB Standards

Only two accounting standard-setters have adopted comprehensive standards for recognising and measuring financial instruments - the US Financial Accounting Standards Board and the International Accounting Standards Committee. How similar are the two sets of standards? In my judgment, quite similar, particularly with respect to which financial instruments are recognised, how they are measured in the balance sheet, when they are removed (derecognised), when impairment is recognised, and the circumstances in which hedge accounting is (and is not) appropriate.

This article summarises the principles in both sets of standards and highlights where they are similar and where they are not.

IAS 39	FASB STANDARDS Especially 114, 115, 125, 133
IASC: Scope	FASB: Scope
All enterprises	Same
Covers recognition, measurement, derecognition, and hedge accounting	Same
IASC: Definitions	FASB: Definitions
A financial instrument is any contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another enterprise. A financial asset is cash, a contractual right to receive cash or another financial asset from another enterprise, a contractual right to exchange financial instruments with another enterprise under conditions that are potentially unfavourable, or an equity instrument of another enterprise. A financial liability is any liability that is a contractual obligation to deliver cash or another financial asset to another enterprise, or to exchange financial instruments with another enterprise under conditions that are potentially unfavourable.	Same
If an enterprise has a contractual obligation that it can settle either by paying out a financial assets or its own equity securities, and if the number of equity securities required to settle the obligation varies with changes in their fair value so that the total fair value of the equity securities paid always equals the amount of the contractual obligation, the obligation should be accounted for as a financial liability, not as equity.	FASB standards do not require that such an obligation be classified as a liability.
A derivative is a financial instrument— (a) - whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the ‘underlying’); (b) - that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and (c) - that is settled at a future date.	FASB definition states that a derivative is a financial instrument or other contract. (a) – same (b) – same (c) – FASB definition requires that the terms of the derivative contract require or permit net settlement.
IASC: Initial Recognition and Measurement	FASB: Initial Recognition and Measurement
All financial assets and financial liabilities are recognised on the balance sheet, including all derivatives	Same
Initially, they are measured at the fair value of whatever was paid or received to acquire the financial asset or liability.	Same
Transaction costs are included in the initial measurement of all financial instruments.	FASB does not address transaction costs. Such costs can be included in or excluded in initial measurement of financial instruments.
An enterprise will recognise normal purchases and sales of securities in the market place either at trade date or settlement date. If settlement date accounting is used for purchases, IAS 39 requires recognition of certain value changes between trade and settlement dates so that the income statement effects are the same for all enterprises.	FASB does not address trade date vs. settlement date. Value change between trade and settlements dates may be included in or excluded from measurement of net income.
IASC: Subsequent Measurement of Financial Assets...	FASB: Subsequent Measurement of Financial Assets...
...At Fair Value:	...At Fair Value:
All financial assets held for trading	Same
All debt securities, equity securities, and other financial assets that are not held for trading but nonetheless are available for sale – except those unquoted equity securities whose fair value cannot be measured reliably by another means are measured at cost subject to an impairment test.	All debt securities, equity securities, and other financial assets that are not held for trading but nonetheless are available for sale – except all unquoted equity securities are measured at cost subject to an impairment test.
All derivative assets and derivative liabilities, unless they are linked to and must be settled by an unquoted equity whose fair value cannot be measured reliably	FASB does not require fair value for any unquoted equity security but their standard does not make an exception from fair value for a derivative that is indexed to an unquoted equity whose fair value cannot be measured reliably
Certain derivatives that are embedded in non-derivative instruments	Same
...At Cost:	...At Cost:
Originated loans and receivables	Same
Enterprise does not have to demonstrate intent and ability to hold to maturity for originated loans and receivables	Same
Certain other fixed-maturity investments that the enterprise intends and has the ability to hold to maturity	Same
Strict tests for held-to-maturity	Same
An intended or actual sale of a held-to-maturity security due to a non-recurring and not reasonably anticipated circumstance beyond the enterprise's control does not call into question the enterprise's ability to hold its remaining portfolio to maturity.	Same
Tainting of held-to-maturity category by early sale causes all remaining held-to-maturity assets to be measured at fair value.	Same
If an enterprise is prohibited from classifying financial assets as held-to-maturity because it has actually sold some such assets before maturity, that prohibition expire at the end of the second financial year following the premature sales.	FASB standard is silent as to whether or when such "tainting" is ever cured.
Unquoted equity instruments (such as ordinary shares) whose fair value cannot be reliably measured, along with derivatives that are linked to and must be settled by delivery of such unquoted equities	FASB reports all unquoted equity instruments at cost even if fair value can be measured reliably by means other than a quotation in an active market. FASB requires fair value measurement for all derivatives, including those linked to unquoted equity instruments if they are to be settled in cash.
Write-down against net profit or loss for impairment or uncollectibility if recoverable amount of a financial asset carried at cost exceeds carrying amount	Same
Reversal of write-down into net profit or loss if fair value recovers.	Write-down results in new cost basis and reversal of value is not recognised.
IASC: Subsequent Measurement – Financial Liabilities	FASB: Subsequent Measurement – Financial Liabilities
All financial liabilities are measured at original recorded amount less principal repayments and amortisation except for derivative liabilities and liabilities held for trading (such as securities borrowed by a short seller), which are remeasured to fair value.	Same
IASC: Reporting Fair Value Changes	FASB: Reporting Fair Value Changes
For those financial assets and liabilities that are remeasured to fair value, an enterprise has a single, enterprise-wide option to either: (a) recognise the entire adjustment in net profit or loss for the period; or (b) recognise in net profit or loss for the period only those changes in fair value relating to financial assets and liabilities held for trading, with value changes in non-trading items reported in equity until the financial asset is sold, at which time the realised gain or loss is reported in net profit or loss.	FASB requires option (b) for all enterprises.
IASC: Derecognition	FASB: Derecognition
A financial asset is derecognised if the transferee has the right to sell or pledge the asset; and the transferor does not have the right to reacquire the transferred assets. (However, such a right does not prevent derecognition if either the asset is readily obtainable in the market or the reacquisition price is fair value at the time of reacquisition.)	In addition to those criteria, FASB requires that the transferred assets be legally isolated from the transferor even in the event of the transferor’s bankruptcy.
A financial liability is derecognised if the debtor is legally released from primary responsibility for the liability (or part thereof) either judicially or by the creditor.	Same
Guidance in IAS 39 includes the following example. A bank transfers a loan to another bank, but to preserve the relationship of the transferor bank with its customer, the acquiring bank is not allowed to sell or pledge the loan. Although the inability to sell or pledge would suggest that the transferee has not obtained control, in this instance the transfer is a sale provided that the transferor does not have the right or ability to reacquire the transferred asset.	While a similar example is not included in FASB Standards, FASB Standards might be interpreted as prohibiting derecognition by the transferor bank.
IASC: Hedge Accounting	FASB: Hedge Accounting
Hedge accounting is permitted in certain circumstances, provided that the hedging relationship is clearly defined, measurable, and actually effective.	Same
Use of noncash hedging instruments is restricted to exposure to hedges of any risk of gain or loss from changes in foreign currency exchange rates arising in fair value hedges, cash flow hedges, or hedges of a net investment in a foreign operation.	Use of noncash hedging instruments is restricted to fair value hedges of the exposure to hedges of risk of gain or loss from changes in foreign currency exchange rates arising in firm commitments or hedges of a net investment in a foreign operation.
Three types of hedges are defined: Fair value hedge Cash flow hedge Hedge of a net investment in a foreign entity	.
Fair value hedge definition: a hedge of the exposure to changes in the fair value of a recognised asset or liability (such as a hedge of exposure to changes in the fair value of fixed rate debt as a result of changes in interest rates). However, a hedge of an unrecognised firm commitment to buy or sell an asset at a fixed price in the enterprise’s reporting currency is accounted for as a cash flow hedge	Same... ...except that a hedge of an unrecognised firm commitment to buy or sell an asset at a fixed price in the enterprise’s reporting currency is accounted for as a fair value hedge.
Fair value hedge accounting: The gain or loss from remeasuring the hedging instrument at fair value is recognised immediately in net profit or loss. At the same time, the gain or loss on the hedged item attributable to the risk being hedged adjusts the carrying amount of the hedged item and is recognised immediately in net profit or loss.	Same
Cash flow hedge accounting: The portion of the gain or loss on the effective hedging instrument is recognised initially directly in equity. Subsequently, that amount is included in net profit or loss in the same period or periods during which the hedged item affects net profit or loss (for example, through cost of sales, depreciation, or amortisation).	Same
Cash flow hedge accounting: For a hedge of forecasted sales, the gain or loss on the hedging instrument will be included in net profit or loss in the same period as the sales revenue is recognised.	Same
Cash flow hedge accounting: For a hedge of a forecasted asset and liability acquisition, the gain or loss on the hedging instrument will adjust the basis (carrying amount) of the acquired asset or liability. The gain or loss on the hedging instrument that is included in the initial measurement of the asset or liability is subsequently included in net profit or loss when the asset or liability affects net profit or loss (such as in the periods that depreciation expense, interest income or expense, or cost of sales is recognised).	Cash flow hedge accounting: For a hedge of a forecasted asset and liability acquisition, the gain or loss on the hedging instrument will remain in equity when the asset or liability is acquired. That gain or loss will subsequently included in net profit or loss in the same period as the asset or liability affects net profit or loss (such as in the periods that depreciation expense, interest income or expense, or cost of sales is recognised). Thus, net profit or loss will be the same under IAS and FASB Standards, but the balance sheet presentation will be net under IAS and gross under FASB.
Hedge of a net investment in a foreign entity: accounted for same as a cash flow hedge.	Same
Specific designation: The enterprise must designate a specific hedging instrument as a hedge of a change in value or cash flow of a specific hedged item, rather than as a hedge of an overall net balance sheet position. However, the approximate income statement effect of hedge accounting for an overall net position can be achieved, in some cases, by designating part of one of the underlying items as the hedged position.	Same