Under IFRS, the legal form does not drive classification of debt instruments rather, the nature of the cash flows of the instrument and the entity’s business model for managing the debt instruments are the key considerations for classification. For example, available-for-sale debt instruments that are securities in legal form are typically carried at fair value, even if there is no active market to trade the securities.Īt the same time, a debt instrument that is not in the form of a security (for example, a corporate loan) is accounted for at amortized cost even though both instruments (i.e., the security and the loan) have similar economic characteristics. Under US GAAP, the legal form of a debt instrument primarily drives classification. Under IFRS 9, investments in debt instruments are either measured at: (1) amortized cost, (2) FVOCI (with subsequent reclassification to profit or loss) or (3) FVPL, depending on the entity’s business model for managing the assets and the cash flows characteristic of the instrument. Under US GAAP, investments in equity instruments are generally measured at FVPL, with an alternative measurement option for equity investments without a readily determinable fair value. Under IFRS 9, investments in equity instruments are measured at fair value through profit or loss ( FVPL) (with an irrevocable option to measure those instruments at fair value through other comprehensive income (FVOCI) with no subsequent reclassification to profit or loss). The specialized US guidance and the singular IFRS guidance in relation to classification can drive differences in measurement (because classification drives measurement under both IFRS and US GAAP). Unlike US GAAP, IFRS 9 contains all of the classification and measurement guidance for financial assets, and does not provide any industry-specific guidance. Under US GAAP, various specialized pronouncements provide guidance for the classification of financial assets.
The impairment guidance in this section therefore compares the current US GAAP guidance (pre-ASC 326) with the new impairment guidance under IFRS 9. The new impairment guidance under ASC 326 is not yet effective for US GAAP, while the IFRS 9 impairment guidance was effective as of January 1, 2018. The new classification and measurement guidance was effective for both US GAAP and IFRS as of January 1, 2018, and the similarities and differences are covered in detail in this section.
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In January 2016, the FASB issued its new recognition and measurement guidance – Accounting Standards Update 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, and in June 2016, the FASB issued its new impairment guidance – Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326). With the publication of IFRS 9, Financial Instruments, in July 2014, the IASB completed its project to replace the classification and measurement, as well as the impairment guidance for financial instruments. IFRS vs US GAAP Financial assets – Both the FASB and the IASB have finalized major projects in the area of financial instruments.