Differences Between U.S. FAS 133 and International IAS 39/IFRS 9 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


Differences (Comparisons) between FAS 133 and IAS 39/IFRS 9 --- http://www.trinity.edu/rjensen/caseans/canada.htm

2011 Update

"IFRS and US GAAP: Similarities and Differences" according to PwC (2011 Edition)
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!
Note that warnings are given throughout the document that the similarities and differences mentioned in the booklet are not comprehensive of all similarities and differences. The document is, however, a valuable addition to students of FASB versus IASB standard differences and similarities.

It's not easy keeping track of what's changing and how, but this publication can help. Changes for 2011 include:

This continues to be one of PwC's most-read publications, and we are confident the 2011 edition will further your understanding of these issues and potential next steps.

For further exploration of the similarities and differences between IFRS and US GAAP, please also visit our IFRS Video Learning Center.

To request a hard copy of this publication, please contact your PwC engagement team or contact us.

Jensen Comment
My favorite comparison topics (Derivatives and Hedging) begin on Page 158
The booklet does a good job listing differences but, in my opinion, overly downplays the importance of these differences. It may well be that IFRS is more restrictive in some areas and less restrictive in other areas to a fault. This is one topical area where IFRS becomes much too subjective such that comparisons of derivatives and hedging activities under IFRS can defeat the main purpose of "standards." The main purpose of an "accounting standard" is to lead to greater comparability of inter-company financial statements. Boo on IFRS in this topical area, especially when it comes to testing hedge effectiveness!

One key quotation is on Page 165

IFRS does not specifically discuss the methodology of applying a critical-terms match in the level of detail included within U.S. GAAP.
Then it goes yatta, yatta, yatta.

Jensen Comment
This is so typical of when IFRS fails to present the "same level of detail" and more importantly fails to provide "implementation guidance" comparable with the FASB's DIG implementation topics and illustrations.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

Bob Jensen's threads on accounting standards setting controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

 


2010 IASB Exposure Draft

"IASB publishes exposure draft on hedge accounting," IAS Plus, December 9, 2010 ---
http://www.iasplus.com/index.htm

The International Accounting Standards Board (IASB) has published for public comment an exposure draft on the accounting for hedging activities. The exposure draft proposes requirements designed to enable companies to better reflect their risk management activities in their financial statements, and, in turn, help investors to understand the effect of those activities on future cash flows.

The proposed model is principle-based, and is designed to more closely align hedge accounting with risk management activities undertaken by companies when hedging their financial and non-financial risk exposures.

Summary of the ED proposals

  • A new hedge accounting model which combines a management view that aims to use information produced internally for risk management purposes and an accounting view that seeks to address risk management issue of the timing of recognition of gains and losses
  • Look only at whether a risk component can be identified and measured, as opposed to determining what can be hedged by type of item (financial or non-financial)
  • Base qualification for hedge accounting on how entities design hedges for risk management purposes and permit hedging relationships to be adjusted without necessarily stopping and potentially restarting hedge accounting
  • Treat the time value premium of a purchased option as a cost of hedging, which will be presented in other comprehensive income (OCI)
  • Extending the use of hedge accounting to net positions (to improve the link to risk management)
  • A comprehensive set of new disclosures that focus on the risks being hedged, how those risks are being managed and the effect of hedging those risks upon the primary financial statements

The exposure draft forms part of the IASB’s overall project to replace IAS 39 Financial Instruments: Recognition and Measurement, and when its proposals are confirmed they will be incorporated into IFRS 9 Financial Instruments. The exposure draft does not include consideration of portfolio macro hedge accounting which the IASB will continue to discuss.

The exposure draft ED/2010/13 Hedge Accounting is open for comment until 9 March 2011. The IASB intends to finalise and issue the proposals during the first half of 2011.

Click for:

Jensen Comment
Because preparers and auditors complained over the years about the complexity of IAS 39, the IASB in this ED mistakenly assumes that doing away with bright lines in favor of ambiguity reduces complexity. But replacing bright lines with ambiguity in and of itself creates more rather than less complexity. It is analogous to replacing a bright line speed sign reading "20 mph maximum" with "Drive Safely in this School Zone."

For example the ED replaces the bright line 80-125 rule for effectiveness limits of in offset testing of effectiveness with ambiguity about when a hedge of a hedged item should be deemed effective. Similarly, IAS 39 was relatively clear about when portfolios of hedged items could be hedged as a portfolio. The ED creates a very ambiguous term "Group Hedging" that is both ambiguous and takes international hedge accounting further and further away from the U.S. FAS 133 standard that allows portfolio or group hedging in under vastly more limiting and clear cut rules.

Effectiveness testing of purchased options used as hedging instruments is pretty clear cut under FAS 133 and IAS 39. The new IASB ED complicates accounting for the time values of options used for hedging purposes. It introduces the concept of "aligned time value" which will really confuse most auditors and financial analysts.

The net result will be that two different companies are likely to treat many hedging contracts differently when applying hedge accounting under the revised IFRS 9 into which FAS 39 is to be phased into IFRS 9. By introducing greater ambiguity the price will be that comparability between financial statements of different companies will be destroyed or highly uncertain.

I repeat that replacing bright lines with ambiguity may actually increase complexity rather than reduce complexity. The complexity of hedge accounting essentially arises from the immense complexity and variations of hedge accounting contracts. IAS 39 was rooted in FAS 133 which I viewed as a good standard, as amended,  that provided more consisted accounting for derivative financial instruments and hedging activities. The new IAS 39 ED is a move in the wrong direction from FAS 133.

Greater ambiguity is not the solution to dealing with complexity. Ambiguity does eliminate the main problems accountants have with derivatives when the main problems are not really understanding derivatives rather than writing ambiguous accounting standards for complex derivatives contracts.


January 2010 IFRS Update from Ernst & Young ---
http://commons.aaahq.org/files/7d1fad745e/January_2010_IFRS_outlook.pdf

January 2010 Comparison of US GAAP versus IFRS from Ernst & Young
http://commons.aaahq.org/files/2ddee9578c/IFRS_Basics_Novemberr2009_BB1856.pdf

Bob Jensen's threads on free IFRS learning resources (including real-world cases) ---
http://www.trinity.edu/rjensen/theory01.htm#IFRSlearning


Differences between FAS 133 and IAS 39 --- http://www.iasplus.com/country/compare.htm

Comparisons of IFRS with Domestic Standards of Many Nations
http://www.iasplus.com/country/compare.htm

 


Good News and Bad News:  Update on IAS 39 Revisions

I call your attention to the IAS Plus summary of the
Notes from the IASB Special Board Meeting
October 6,  2009 --- http://www.iasplus.com/index.htm

The IASB met for a special meeting relating to the IAS 39 replacement project. Several Board members including the Chairman, FASB members, and FASB staff joined the meeting via video link.

Many of these items are especially interesting when teaching IFRS, when teaching contemporary issues in accountancy, and when teaching about accounting for derivative financial instruments and hedge accounting (although recent amendments of IAS 39 have taken this famous/infamous and very complicated standard beyond the scope of the original IAS 39 and the current FAS 133 in the U.S.)

There are various items taken up in the October 6 IASB meeting not discussed below. Hence if you're interested in the entire meeting go to the IASB Special Board Meeting summary: 
October 6,  2009 --- http://www.iasplus.com/index.htm

One significant difference that will arise between IAS 39 and FAS 133 lies in the IAS decision to end the requirement of bifurcation of host contracts (such as mortgage loans) from embedded derivatives (such as the embedded option to pay the loan off before maturity) when the underlying (such as a LIBOR interest rate) of the host contract is not "clearly and closely related" to the underlying of the embedded derivative.

Accounting for embedded derivatives

The Board was presented with the alternative to eliminate bifurcation of embedded derivatives. Several Board members were concerned that this decision together with the frozen spread approach adopted for measurement of financial liabilities would lead to hybrid instruments with a financial liability as a host not to be valued at fair value. By implication this means that the derivative part of the hybrid instruments would be valued at the frozen spread approach and not fair value. The staff defended this position by arguing that the credit adjustment to the derivative portion of the hybrid contract would not be significant. One Board member was particularly concerned about the effect of this decision on convergence – a point reinforced by a FASB member who expressed his view that such IASB decision would make convergence in this area next to impossible.

Nonetheless, the Board narrowly approved the elimination of bifurcation of financial liabilities as well as financial assets.

The above decision will lead to fewer derivative financial instruments being booked under FAS 39 relative to what would be booked under FAS 133. It seems to me to be politically incorrect to bring about such changes at a time when the SEC is still wavering to eliminate U.S. GAAP in favor of IASB standards.

What the IASB seems to have ignored is the valuation problems created by unique (customized) instruments that are not traded in the markets. Suppose Security AB with a "closely related" embedded Option B is Bond A that is actively traded with the embedded embedded Option B for paying off the debt before maturity. Early payoff embedded options are extremely common in bonds that are actively traded in the securities markets. Usually the embedded options for early payoff are deemed clearly and closely related under IAS 39 rules such that the embedded Option B previously did not have to be bifurcated and accounted for separately as a derivative financial instrument. Market values of Security AB impound both the value of the security and its embedded (non-bifurcated) option. Until the IASB changed its position on October 6, however, embedded options that were not clearly and closely related had to be bifurcated and accounted for separately.

For example, suppose Security ABXY is Security AB plus embedded Options X and Y that are not "clearly and closely related" in terms of underlyings.  Further assume Options X and Y can be valued in their own options markets. In other words there are deep and active markets for valuing Security AB, Option X, and Option Y. There is no deep and active market for the customized Security ABXY. Security ABXY is a unique, customized security that is not traded in an active and deep market.

It is highly unlikely that the total value of Security ABXY is the additive sum of the values of Security AB plus the value of Option X plus the value of Option Y. These components of Security ABXY are likely to interact such that valuation of Security ABXY becomes exceedingly difficult if the embedded Options X and Y are not bifurcated. In terms of FAS 157, it is no longer possible to apply the sought-after Level 1 valuation for Security ABXY, even though Level 1 can be applied if the embedded Option X and Options Y were bifurcated.

Alas, throughout history accountants have been very good at naively adding up components of value that are not truly additive. For example, throughout the history of accounting firms have added up balance sheet asset values and reported the sum as the total value of Total Assets when the assets have interactions (covariances) that are totally ignored in the summation process. Only when buyers and sellers negotiate for the purchase/sale of the entire bundle (in mergers and acquisitions) do accountants reveal that, in truth, they understand that the accounting figure for "Total Assets" on the balance sheet is sheer nonsense.

**********

I was especially intrigued by the following module in the IAS Plus Notes:

Application of cash flow hedge accounting mechanics to fair value hedges

The Board considered the application of the Board's September 2009 decision to replace fair value hedge accounting with a mechanism that permitted recognition outside profit or loss of gains and losses on financial instruments designated as hedging instruments – that is, applying the mechanics of cash flow hedge accounting also to fair value hedges. The major implication would be the application of the so-called 'lower-of test' to fair value hedges. The 'lower-of test', currently applied to cash flow hedges only, ensures that only ineffectiveness due to excess cash flows on the hedging instrument (that is, the derivative) is recognised in profit or loss.

The Board members disagreed with the extension of the 'lower-of test' to fair value hedges. The Board was concerned that it was inconsistent with the nature of fair value hedging, could lead to changes in eligibility of portions, could have unintended consequences in the area of deliberately under-hedging, and in effect would lead to a situation that there would be no ineffectiveness in fair value hedges as such. A FASB member clarified that in the FASB approach to hedge accounting (given the recent discussions over the issue) the 'lower of test' would not be applied to fair value hedges.

After a short debate the Board decided by a bare majority (8 votes) to retain the 'lower-of test' for cash flow hedges only. A third of the Board members abstained in this vote.

Jensen Comment
Cash flow hedge accounting in FAS 133 and IAS 39 is relatively straight forward when a derivative financial instrument (e.g., forward contract, futures contract, swap, or option) is used to hedge cash flow risk in a hedged item (forecasted transaction or a booked item subject to cash flow risk such as a variable-rate bond or purchase contract setting the purchase price at an unknown future spot price or rate).

Cash flow hedge accounting, like foreign exchange hedge accounting, entails offsetting changes in value of the hedging derivative with a posting to an equity account (FAS 133 requires posting to OCI). The simplifying feature of cash flow hedge accounting is that it makes no difference whether the hedged item is booked (e.g., a bond asset or liability having variable rate revenue) or unbooked (e.g., a forecasted transaction to buy inventory or to buy/sell fixed-rate bonds at a future date where the fixed-rate is currently unknown).

The reason cash flow hedging is not affected by a difference between a booked or unbooked hedged item is that a hedged item subject to cash flow risk has no future value risk. Consider a variable rate bond having a booked value of $1,000. There is future cash flow risk, but the future value of the bond will always be $1,000 assuming no change in credit risk (I am only considering a hedge of cash flow risk here). Similarly, if Southwest Airlines has a forecasted transaction to buy a million gallons of jet fuel at spot rates six months from now, there is no risk that the value on the purchase will differ from the value of jet fuel on that future date. Value risk arises when the forecasted transaction is instead a firm commitment to buy at some price other than spot rates. But if there is a firm commitment price there is no cash flow risk (only value risk that the purchase price will differ from the spot price on the date of the purchase).

Fair value hedge accounting is more complicated because it matters greatly whether the hedged item is booked or not booked. For example, there is no cash flow risk of booked inventory already bought and paid for in a warehouse. There is, however, purchase-price value risk that the spot price of that inventory diverge from the price already paid for the inventory. Companies frequently hedge the fair value of inventory (although this is not necessarily a hedge of profit is selling prices are not hedged and only purchase prices are hedged if purchase and selling prices are not perfectly correlated).

Hedge accounting is not usually allowed (or called for) when hedging a booked item carried at fair value. In theory the changes in value of the hedged item should offset the changes in the value of the hedging derivative contract and any hedging ineffectiveness should be charged to current earnings in any case. If the hedged item is carried at historical cost, no such offset would arise and hedge accounting is called for at least to the extent the hedge is effective. Under FAS 133 and IAS 39, the hedge accounting for such a hedged item calls for change the basis of accounting of the hedged item during the hedge accounting period. Instead of the customary historical cost accounting (say for jet fuel inventory), the hedge accounting rules call for a change to fair value accounting of that inventory during the hedging period.

The most confusing part of fair value hedge accounting arises when the hedged item is not booked. For example, purchase contracts are typically not booked in accounting (never have been and hopefully never will be). For example, if Southwest Airlines signs a firm commitment to buy jet fuel six months from now at $2.89 per gallon the firm commitment is not booked. There is no cash flow risk since the purchase price is fixed. There is value risk, however, that the spot price in six months will be higher or lower than the $2.89 purchase (forward, strike) price.

Now the accounting becomes complicated because there is no booked hedged item value to be offset by a change in the booked hedging derivative change in value. Fair value hedge accounting of unbooked hedged items calls for changes in the value of the booked hedging contract to be offset by a posting to an equity account. In FAS 133 the FASB recommends a badly-named equity account called Firm Commitment. For example, to see how this works 03forfut.pps slide show file listed at http://www.cs.trinity.edu/~rjensen/Calgary/CD/JensenPowerPoint/
The above slide show compares cash flow hedging versus fair value hedging of booked items versus fair value hedging of unbooked (forecasted transaction) hedged items.

Above I said that the "Firm Commitment" equity account called for in FAS 133 is badly named because changes in the value of fair value hedging contracts are not firm commitments (although they may hedge a firm commitment unbooked hedged item). I would've preferred some other name like "unrealized change in fair value hedging contracts" as an equity account.

Now the debate centers on whether the "Firm Commitment" equity account used for fair value hedge accounting of unbooked hedged items is tantamount to the "OCI" equity account used for booked and unbooked cash flow and FX hedge accounting?

Firstly, there is a difference since fair value hedges to not impact any equity account if the hedged items are booked and carried at fair value themselves. Fair value hedges of unbooked items create the special and confusing aspect of hedge accounting relief for fair value hedging.

What the IASB is currently debating with respect to amending IAS 39 is whether hedge accounting would be greatly simplified by always offsetting changes in hedge contact fair value to OCI (by whatever name) to the extent the hedge is effective. Presumably the changes in the value of a booked hedged item would also be charged to OCI (e.g., like available for sale investment changes in value are currently accounted for under the amended FAS 115/130). Such accounting could apply equally to cash flow, fair value, and FX hedges.

If the above simplification sounds to ideal, what is holding it up? Why did the IASB turn down this simplification in the October 6, 2009 special board meeting?

The reasoning of the IASB on October 6 seems to have been that the proposed "simplification" of fair value hedge accounting is would not leave any hedge ineffectiveness to be charged to current earnings for some fair value hedges whereas all hedge ineffectiveness of cash flow and FX hedges  is charged to current earnings.

Hedges are often not fully effective at interim points in time. Options as hedging derivatives, for example, are notoriously ineffective as hedges and seldom meet the "80-125 percent test" of hedge effectiveness specified in Paragraph BC 106 of IAS 39. One reason is that speculators are more often more dominant in options trading markets vis-a-vis commodities markets themselves.

Option values are divided into two components --- time value plus intrinsic value (equal the amount by which an option is in-the-money). Interim changes (before option expiration) in total option hedging value seldom satisfy the "80-125 percent test" or hedge effectiveness. It is common in hedge accounting under FAS 133 and IAS 39 rules to charge all changes in an option's time value to current earnings and only allow hedge accounting relief to changes in intrinsic value (which are zero until if and when the option is in-the-money).

It would be a sorry state of affairs if the IASB had essentially voted for hedge ineffectiveness to be ignored for fair value hedging. This would be entirely inconsistent with hedge accounting for cash flow and FX hedges where both FAS 133 ahd IAS 39 require that hedge ineffectiveness be posted to current earnings. This is also required at present for fair value hedge ineffectiveness. How sad it would be if the IASB voted in a huge inconsistency for treating hedge ineffectiveness for fair value hedging relative to cash flow and FX hedge accounting.

Whew! That was a close one that came within eight votes, at the IASB special meeting on October 6, of injecting a huge inconsistency between fair value hedging versus cash flow and FX hedge accounting. If the proposed amendment had passed it would greatly simplify the accounting at the expense of greatly complicating financial statement analysis.

For added illustrations go to http://www.trinity.edu/rjensen/CaseAmendment.htm

My PowerPoint shows, examination materials, and free tutorials are at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/

My overall links to FAS 133 and IAS 39 free tutorials are at
http://www.trinity.edu/rjensen/caseans/000index.htm


Question
Should international accountants learn more about FAS 133 on accounting for derivative financial instruments?

Bob Jensen's Answer
My answer is most certainly yes even when IAS 39 is to be applied as a standard outside the United States. I like to commence my foreign workshops on this by making a case that it is important to learn many parts of FAS 133. The problem with IAS 39 is that, like most IFRS, it is “principles-based” and does not address many complicated contracts encountered by auditors in practice. When the literature is silent about how to treat many of these contracts, the auditors must be highly trained experts to reason down from a “principles-based” standard that is silent as to the type of contract encountered.

One source to turn to in such instances is FAS 133. FAS 133 and the accompanying DIG guidelines discuss many of these difficult contracts not addressed in IAS 39. Hence it advised that auditors turn to FAS 133 to find out what accounting treatment is recommended and then reason out whether this is consistent with the general “principles” in IAS 39.

My point here that the short listing of differences between the two standards really overlooks the underlying problem that there are a huge number of unmentioned differences due to the silence of IAS 39 on thousands of types of contracts covered in FAS 133 and the DIG pronouncements.

This is why most international auditors end up having to use FAS 133 as a reference when applying IAS 39 as a standard. I will point out the major differences between IAS 39 and FAS 133 as I go along, but I will also ask the audience to consider the many instances where IAS 39 just does not do the job, especially in the DIG pronouncements that you will find in back of the green book that I brought you last year.

In summary, my workshop approach is mainly to focus on illustrations and then point out where IAS 39 departs from FAS 133.

You can read more about FAS 133 (in black), IAS 39 (in green), and DIG pronouncements (in red) at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

My tutorials are at http://www.trinity.edu/rjensen/caseans/000index.htm

My updated workshop multimedia CD, that includes PowerPoint files, that is handed out at my workshops can be found at http://www.cs.trinity.edu/~rjensen/Trinidad/CD/

I might add that U.S. GAAP in general is useful to international auditors since IFRS in general still lacks the specificity of dealing with contracts encountered worldwide. U.S. GAAP is most certainly not appropriate in all international situations, but when IFRS is totally silent about a particular contract encountered in practice, U.S. GAAP may at least have a recommended treatment for such a contract. It is then up to the international accountant/auditor to then reason out whether the U.S. approach is appropriate under the IFRS broad principles.

Deloitte provides a very helpful and consistent set of differences between IFRS and U.S. GAAP. What this listing overlooks is the thousands of situations where U.S. GAAP considers a particular type of contract about which IFRS is silent. The DIG pronouncements are excellent examples of such contracts --- http://www.fasb.org/derivatives/

The Deloitte listing of IFRS vs. GAAP in various nations is at http://www.iasplus.com/country/compare.htm
This is more up to date than the reference shown below from the FASB.

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) --- http://www.fasb.org/intl/iascpg2d.shtml
Of course some of this is now outdated.


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 Delotte listing of IFRS vs. GAAP in various nations is at http://www.iasplus.com/country/compare.htm
This is more up to date than the reference shown below from the FASB.


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://www.fasb.org/intl/iascpg2d.shtml 

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

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

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]