I. Key Differences Between IAS 39 Versus FAS 133

A. Some Key Differences That Remain

Definitions of derivatives

IAS 39: Does not define “net settlement” as being required to be scoped into IAS 39 as a derivative such as when interest rate swap payments and receipts are not net settled into a single payment.
FAS 133: Net settlement is an explicit requirement to be scoped into FAS 133 as a derivative financial instrument.
Implications: This is not a major difference since IAS 39 scoped out most of what is not net settled such as Normal Purchases and Normal Sales (NPNS) and other instances where physical delivery transpires in commodities rather than cash settlements.

Offsetting amounts due from and owed to two different parties

IAS 39: Required if legal right of set-off and intent to settle net.
FAS 133: Prohibited.

Multiple embedded derivatives in a single hybrid instrument

IAS 39: Sometimes accounted for as separate derivative contracts
FAS 133: Always combined into a single hybrid instrument.
Implications: FAS 133 does not allow hybrid instruments to be hedged items. This restriction can be overcome in some instances by disaggregating for implementation of IAS 39.

Subsequent reversal of an impairment loss

IAS 39: Previous impairment losses may be reversed under some circumstances.
FAS 133: Reversal is not allowed for HTM and AFS securities.
Implications: The is a less serious difference since Fair Value Options (FVOs) were adopted by both the IASB and FASB. Companies can now avoid HTM and AFS implications by adopting fair values under the FVO hedged instrument.

Derecognition of financial assets

IAS 39: It is possible, under restrictive guidelines, to derecognise part of an a financial instrument and no "isolation in bankruptcy" test is required.
FAS 133: Derecognise financial instruments when transferor has surrendered control in part or in whole. An isolation bankruptcy test is required.
Status: This inconsistency in the two standards will probably be resolved in future amendments.

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

IAS 39: Can qualify for hedge accounting for FX risk but not cash flow or fair value risk.
FAS 133: Cannot qualify for hedge accounting.

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

IAS 39: Can qualify for hedge accounting.
FAS 133: Cannot qualify for hedge accounting.

Assuming perfect effectiveness of a hedge if critical terms match

IAS 39: Hedge effectiveness must always be tested in order to qualify for hedge accounting.
FAS 133: The “Shortcut Method” is allowed for interest rate swaps.
Implications: This is am important difference that will probably become more political due to pressures from international bankers.

Use of "basis adjustment"

IAS 39:
Fair value hedge: Basis is adjusted when the hedge expires or is dedesignated.
Cash flow hedge: Basis is adjusted when the hedge expires or is dedesignated.
FAS 133:
Fair value hedge: Basis is adjusted when the hedged item is sold or otherwise utilized in operations such as using raw material in production (Para 24)
Cash flow hedge of a transaction resulting in an asset or liability: OCI or other hedge accounting equity amount remains in equity and is reclassified into earnings when the earnings cycle is completed such as when inventory is sold rather than purchased or when inventory is used in the production process. (Para 376)

IAS 39 Macro hedging

IAS 39: Allows hedge accounting for portfolios having assets and/or liabilities with different maturity dates.
FAS 133: Hedge accounting treatment is prohibited for portfolios that are not homogeneous in virtually all major respects.
Implications: This is pure theory pitched against practicality, politics, and how industry hedges portfolios. It is a very sore point for companies having lots and lots of items in portfolios that make it impractical to hedge each item separately.

B. The Most Important Differences Are the Unstated and/or Unknown Differences

The most important differences may arise simply because both IAS 39 and FAS 133 do not provide bright lines on how to account for a particular financial contract or hedging contract. Financial statements may then differ under the two standards because one company reasoned one way under IAS 39, whereas a similar contract is accounted for differently by a company that reasoned another way under FAS 133.

Similarly FAS 133 has many more bright lines and other implementation guidance for many more types of derivative instruments than does IAS 39. When faced with such circumstances, many companies under IAS 39 will turn to FAS 133 for guidance. This lends some consistency when for some contracts not mentioned in IAS 39 that are illustrated in IAS 39.

IAS 39 is a clear-cut example of where IFRS standards tend to be “principles-based” whereas U.S. GAAP tends to be “rules-based” with many more bright lines that reduce subjective judgment on how to account for contracts. It’s outside the scope of this portfolio to discuss the merits and drawbacks of each foundation upon which sets of standards rest. Principles-based standards are a bit like common law where the courts make laws more rules based as cases are decided over time. Similarly, standards like IAS 39 become more like “rules-based” standards as accounting practice becomes filled with illustrations of how thousands of types of derivatives contracts are accounted for “by tradition” when bright lines are not spelled out in the standards themselves. Already practice guidance databases such as Comperio[1] from PricewaterhouseCoopers are filling up with illustrations of how some types of contracts have been accounted for that are not mentioned in IAS 39. Of course in some instances FAS 133 is cited for further guidance.

Since IAS 39 is so much less detailed than FAS 133, its implementation may vary widely in some nations due to tradition and national laws that vary between nations. The most obvious instance is where national laws carve out certain parts of IAS 39 as happened in two major parts of IAS 39 due to rulings in European law. More common, however, will be the subtle differences that arise from prior traditions under previous national GAAP. For example, if and when IAS 39 replaces FAS 133, U.S. companies may use FAS 133 for guidance that does not exist in IAS 39. Companies in other nations may prefer not to use FAS 133 for guidance.

[1] “Comperio: Your Path to Knowledge,” PricewaterhouseCoopers --- https://www.pwccomperio.com

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

*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.

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.