1. IAS 32 and 39, IFRS 7 and 9 - Financial assets

2. Executive summary
Under IFRS, the accounting standards in this area have evolved in a cohesive fashion and are contained in three pronouncements (IFRS 7, IAS 32 and IAS 39) with a fourth pronouncement, IFRS 9, Financial Instruments, to take effect in Under US GAAP, the accounting standards in this area have evolved (cost to fair value) with numerous pronouncements spanning approximately 20 years. These standards have now been codified together.
Loans and receivables are included in the scope of IAS 39 even if they are not securities, whereas the scope of ASC 320 only addresses loans and receivables that are securities.
IFRS is inconsistent in the way it defines and measures fair value with different definitions given in various standards, while US GAAP has a more comprehensive framework for determining fair value.
IFRS allows securities that are not marketable to be classified as AFS and measured at fair value, if determinable. US GAAP generally records these securities at cost.

3. Executive summary
IFRS requires equity-method (significant influence) investments to be accounted for under the equity method while US GAAP also allows the fair value option (FVO).
IFRS has a comprehensive derecognition model, covering both assets and liabilities, and looks at whether risks and rewards and control have been transferred. US GAAP focuses on derecognition of financial assets only and uses a control and legal isolation test for derecognition.
There are different impairment tests under both standards.
IFRS allows reversals of impairments in debt securities classified as AFS and HTM to be recognized in income. This is not allowed under US GAAP.

4. Progress on convergence Simplification of accounting for financial instruments
The Boards are currently working on a joint project, Accounting for Financial Instruments, which will address recognition and measurement of financial instruments, as well as classification and measurement, impairment and hedge accounting.
The IASB issued IFRS 9, Financial Instruments, in November 2009 (effective January 2013) and is expected to issue two EDs in 2010 dealing with impairment and hedging.
The FASB is expected to issue a comprehensive overall ED in 2010.
The Boards are committed to achieving a converged solution to reduce financial instruments complexity by the end of 2010.

5. Progress on convergence Fair value measurements
In May 2009, the IASB published an ED with proposed guidance regarding how fair value would be measured when it is already required by existing standards. It does not extend the use of fair value, but rather, like ASC 820, would establish a single source of guidance for all fair value measurements under existing IFRS.
The proposed guidance in the ED would eliminate differences in the definition of fair value between US GAAP and IFRS. The IASB agreed upon a definition that is identical to the definition under ASC 820, that is, fair value based on an exit price. While certain overall differences exist, the proposals outlined in the ED are largely consistent with ASC 820, and the proposed guidance would thus increase convergence with US GAAP.
A standard is expected in the latter half of 2010.

6. Progress on convergence Derecognition
Both Boards are working on reducing differences in the area of derecognition of financial instruments and in 2010 will jointly consider the model the IASB has been implementing.
IFRS 13 – Fair Value Measurement has been issued effective January 1, 2013.

7. Scope
US GAAP
IFRS
Financial assets include cash, receivables, investments and derivatives.
Similar

8. Scope
US GAAP
Accounting for financial assets has been an evolutionary process (cost to fair value) with numerous pronouncements spanning approximately 20 years. These standards have now been codified together.
ASC 320 focuses on investments in marketable securities.
IFRS
Accounting for financial assets has evolved in a more cohesive fashion and is contained in three pronouncements (IFRS 7, IAS 32 and IAS 39) with a fourth pronouncement, IFRS 9, to take effect in 2013.
IAS 39 includes marketable securities as well as other instruments, such as loans and receivables (which may not be marketable securities).

9. Definitions US GAAP IFRS
A financial asset, per the ASC Master Glossary is defined as “cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:
Receive cash or another financial instrument from a second entity, or
Exchange other financial instruments on potentially favorable terms with the second entity.”
IFRS
A financial asset, per IAS 32, paragraph 11) is “ … any asset that is:
Cash
An equity instrument of another entity;
A contractual right:
to receive cash or another financial asset from another entity; or
to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity.
A contract that will or may be settled in the entity’s own equity instruments and is a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments …”

10. Definitions

11. Measurement bases US GAAP IFRS
Amortized cost or fair value can be used as a measurement basis depending on the classification of the financial instrument.
Similar
Upon initial recognition of the instrument, an irrevocable accounting policy choice is allowed to measure instruments at fair value with gains/losses recognized in income. This is referred to as the FVO.
Similar
In terms of fair value, there is an assumption of orderly markets.
Similar

12. Measurement bases Definition of fair value
US GAAP
There is one fair value measurement model whenever fair value is used.
Fair value is an exit price, which may differ from an entry price. It assumes a market participant perspective (e.g., for assets, how much a market participant would pay for the particular asset).
IFRS
Various standards use slightly different wording to define fair value.
Upon initial recognition of a financial instrument, the entry or transaction price is generally considered to be the fair value. Fair value is often an entity-specific value.

13. Measurement bases FVO US GAAP
There are no criteria for using the FVO, although there are certain financial assets that may not be revalued under the FVO.
Equity-method investments may use the equity method of accounting or the FVO.
IFRS
An entity must prove either of the following to use the FVO.
The use of FVO reduces measurement or recognition inconsistencies.
The assets in question are managed by the entity and performance is evaluated on a fair-value basis.
Equity-method investments must use the equity method of accounting.

14. Classification categories and related measurement and reporting
US GAAP
IFRS
Financial assets are required to be sorted into specific categories for classification and measurement purposes as follows:
Trading:
This classification includes debt and marketable equity assets with no significant influence that are intended to be traded.
These assets are measured at fair value with unrealized holding gains/losses reported in income.
Available-for-sale (AFS):
This classification includes debt and marketable equity assets with no significant influence that are not classified as trading/FVPL or held to maturity (HTM).
These assets are measured at fair value with unrealized holding gains/losses reported in OCI.
HTM:
This classification includes debt assets intended to be HTM.
These assets are measured at amortized cost using the effective interest method.
Similar, although trading is part of the category referred to as FVPL

15. Classification categories and related measurement and reporting
US GAAP
IFRS
Financial assets are required to be sorted into specific categories for classification and measurement purposes as follows (continued):
Other assets:
This classification includes non-marketable equity assets with no significant influence.
These assets are measured at cost.
Loans/receivables:
This classification includes conventional loans and receivables.
These assets are generally measured at amortized cost.
Equity-method investments:
This classification includes equity assets with significant influence but no control.
These assets are measured at cost and adjusted thereafter with the investor’s share of post-acquisition earnings (equity method).
Similar

16. Classification categories and related measurement and reporting
US GAAP
Non-marketable equity securities with no significant influence are classified as other assets and measured at cost.
Financial assets classified as AFS with foreign exchange components report all unrealized holding gains/losses in OCI.
Loans and receivables must be classified as loans and receivables and measured at amortized cost.
IFRS
Allows non-marketable equity securities with no significant influence to be classified as other assets and measured at cost or alternatively classified as AFS, if fair value is determinable, with unrealized holding gains/losses reported in OCI.
Financial assets classified as AFS with foreign exchange components report unrealized holding gains/losses due to foreign exchange rates separately in income with the remaining unrealized holding gains/losses in OCI.
Loans and receivables can be classified as loans and receivables and measured at amortized cost or alternatively classified as AFS and measured at fair value with unrealized holding gains/losses reported in OCI (even if not traded).

17. Summary chart for financial assets classification and measurement
Assets included
Measurement basis and related reporting
(not including FVO)
US GAAP
IFRS
Trading
FVPL
Debt and marketable equity assets (no significant influence) intended to be traded
Fair value with unrealized holding gains/losses reported in income
AFS
Debt and marketable equity assets (no significant influence) not classified as trading/FVPL or HTM
Fair value with unrealized holding gains/losses reported in OCI
Non-marketable equity securities (no significant influence) are not permitted to be classified as AFS
See other assets
Non-marketable equity securities (no significant influence) can be alternatively classified here if fair value is determinable. Otherwise, see other assets.
N/A – see other assets
Fair value with unrealized holding gains/losses reported in OCI
Financial assets with foreign exchange components.
Fair value with unrealized holding gains/losses reported in OCI.
Fair value with unrealized holding gains/losses due to foreign exchange separately reported in income and the remaining unrealized holding gains/losses reported in OCI
Conventional loans and receivables are not permitted to be classified as AFS.
See loans/receivables
Conventional loans and receivables can be alternatively classified here. Otherwise, see loans/receivables.
N/A – see loans/receivables
Fair value with unrealized gains/losses reported in OCI
HTM
Debt assets intended to be held to maturity
Amortized cost using the effective-interest method
Other assets (investment in investee)
Non-marketable equity assets (no significant influence)
See AFS above for alternative classification for IFRS
Cost
Loans/receivables
Conventional loans and receivables (held for investment)
Amortized cost
Equity-method investment
Equity assets with significant influence but not control
These assets are measured at cost and adjusted thereafter with the investor’s share of post-acquisition earnings (equity method)

18. Use of the FVO example
Example 2: Extreme Surf (Extreme) has recently raised financing by issuing $1,000 of fixed-rate bonds (5%) to institutional investors. The bonds would otherwise be carried at amortized cost. Assume that the bonds were issued at par.
The money was used to invest in $1,000 of fixed rate (6%) corporate bonds. These bonds are classified as AFS with fair value gains/losses being recorded in OCI. Assume by year-end, interest rates have declined to 5.45%, resulting in the fair value of the bond to be $1,100.
Assuming no use of the FVO, provide the journal entries for how Extreme would record these transactions in year one under US GAAP and IFRS?
Discuss whether the FVO is allowed under US GAAP and IFRS in this situation.
Assuming that the FVO was selected upon initial recording of the bonds, provide the journal entries for how Extreme would record these transactions in year one under US GAAP and IFRS assuming that by year end, interest rates have declined to 4.35%, resulting in the fair value of the issued bonds to be $1,150 and the fair value of the bonds acquired to be $1,380.

19. Use of the FVO example Example 2 solution: - No FVO Bond issuance:
Cash $1,000
Bonds payable $1,000
Year-end:
Interest expense $50
Cash $50
Bond acquisition:
Investment in corporate bonds (AFS) $1,000
Cash $1,000
Investment in corporate bonds (AFS) $100
Unrealized gain – OCI $100
Cash $60
Interest income $60

20. Use of the FVO example
The debt and investment are linked since one was used to finance the other. Because they are both fixed rate, the economic gains on one will offset the losses on another. This is a natural hedge. However, for accounting purposes, there will be a mismatch because the loans on the liability side are carried at amortized cost and not revalued, whereas the bonds on the asset side are classified as AFS, and are, therefore, valued at fair value with unrealized holding gains/losses being reported in OCI.
If the FVO is used, both the asset and liability will be measured at fair value with unrealized holding gains/losses being reported in income.
Under US GAAP, Extreme may designate any financial asset under the FVO. Under IFRS, this would also be allowed since there is an accounting mismatch if the FVO is not chosen. Thus, the FVO reduces recognition inconsistencies.

21. Use of the FVO example Bond issuance: Cash $1,000 Bonds payable $1,000
Year-end:
Interest expense $50
Cash $50
Unrealized loss – income $150
Bonds payable $150
Bond acquisition:
Investment in corporate bonds $1,000
Cash $1,000
Investment in corporate bonds $380
Unrealized gain – income $380
Cash $60
Interest income $60

22. Equity assets that are non-marketable example
The Mountain Climbing Company (MCC) invests in shares of the Everest Company (Everest), whose shares do not trade on the stock exchange and are closely held by entities that have strategic alliances with Everest.
MCC purchased Everest shares for $150 and at year-end, MCC is able to determine that the fair value of the shares is $199. MCC valued the shares using a valuation technique. The shares are not held for trading, MCC does not have significant influence and the FVO has not been utilized. Assume the shares are sold January 1 of the following year for $199 per share.
What classifications and related measurement are available to MCC for this investment under US GAAP and IFRS?
Provide the journal entries for this investment assuming MCC classifies this investment in other assets for US GAAP and AFS for IFRS.
Now assume that the shares are marketable securities. How would the investment be accounted for under both US GAAP and IFRS?

23. Equity assets that are non-marketable example
Example 3 solution:
Classification and measurement
Under US GAAP, as the securities are not marketable, they would be classified as an investment in an investee in other assets and would be recorded at cost.
Under IFRS, the securities could be classified and measured similar to US GAAP or, if fair value is determinable, the securities can be classified as AFS with unrealized holding gains/losses being recognized in OCI or cost in AFS.

24. Equity assets that are non-marketable example
US GAAP:
Investment $150
Cash $150
To record the purchase of the securities
Cash $199
Investment $150
Realized gain on sale 49
To record the sale of the securities
IFRS:
AFS securities $150
Available-for-sale securities $49
Unrealized gain – OCI $49
To revalue the securities to fair value
Unrealized gain – OCI 49
AFS securities $199
Realized gain on sale
Marketable securities
If the shares were marketable securities and the fair values were available, the journal entries under US GAAP would be the same as for AFS under IFRS.

25. Equity-method investments and the FVO example
The Rope Climbing Company (Rope) buys 40% of the common shares of Carabiner Company, resulting in significant influence. The investment cost is $200 and at year-end, Rope’s share of the post-acquisition earnings is $20. The fair value of the investment at that time is $240. There are no dividends.
Explain the choices that Rope has when determining how to account for the investment. Consider both US GAAP and IFRS. Prepare journal entries.

26. Equity-method investments and the FVO example
Example 4 solution: Under US GAAP, the entity may elect to use the FVO or use the equity method. If the equity method is used, the entries would be the same as under IFRS. Under IFRS, the equity method of accounting is required and Rope would recognize its share of post-acquisition earnings.
US GAAP: FVO IFRS:
Purchase date Purchase date
Equity investment $200 Equity investment $200
Cash $200 Cash $200
Year-end Year-end
Equity investment $40 Equity investment $20
Unrealized gain on investment $40 Equity investment income $20

27. AFS debt assets and foreign exchange translation example
The White Water Rafting Company (White Water) buys a bond denominated in a foreign currency (FC) for 100 FC at par value (with no discount or premium). The exchange rate at the purchase date is 1 FC = $1.1 US.
At year-end, the fair value of the bond in the marketplace is 150 FC and the exchange rate is FC = $1.2 US.
Prepare the journal entries that White Water should record for the purchase and subsequent change in value assuming that the investment is classified as AFS under both US GAAP and IFRS.

28. AFS debt assets and foreign exchange translation example
Example 5 solution:
US GAAP: IFRS:
Purchase date Purchase date
AFS investment $110 AFS investment $110
Cash $110 Cash $110
Year-end Year-end
AFS investment $ 70 AFS investment $ 70
Unrealized gain – OCI $ 70 Unrealized gain – OCI $ 60
Unrealized exchange gain – income
The cost is translated to US dollars at the date of purchase. Under IFRS, the exchange gain is bifurcated into two parts with the exchange portion recognized in income ($1.2 – $1.1 = $0.1 x 100 FC = $10) and the rest in OCI (150 FC – 100 FC) X $1.2 = $60.

29. Loans receivable example
Skydivers Inc. (Skydivers) recently loaned $1,000 to a customer on January 5, The loan is interest bearing at 10% (which equals the market interest rate). The loan is due in three years. Skydivers plans to hold the loan until it matures. Assume all criteria for the FVO are met. The fair value of the loan is as follows:
December 31, 2010 – $1,010
December 31, 2011 – $1,005
December 31, 2012 – $1,000
How would Skydivers account for the loan in 2010 through 2012 under US GAAP and IFRS?

30. Loans receivable example
Example 6 solution:
US GAAP:
Skydivers may elect to use the FVO to measure and report this loan. This means that the loan would be measured at fair value at each balance sheet date with unrealized holding gains/losses being recognized in income along with interest. There would be no need to test for impairment.
Otherwise, given that Skydivers plans to hold onto the asset and since it is clearly not a marketable security (this is a loan to a customer, not an instrument that trades on a stock exchange), the loan could be recorded at the amortized cost of $1,000 with interest recognized as interest income. Note that in this case, since market interest is equal to the interest rate on the receivable, there would be no discount and amortized cost would be equal to cost. The instrument would be tested for impairment.

31. Loans receivable example
Amortized cost Fair value option
January 5, 2010
Loan receivable $1,000 Loan receivable $1,000
Cash $1, Cash $1,000
December 31, 2010
Cash $100 Cash $100
Interest income $ Interest income $100
Loan receivable $10
Unrealized gain – income $10
December 31, 2011
Cash $100 Cash $100
Interest income $ Interest income $100
Unrealized loss – income $5
Loan receivable $5
December 31, 2012
Cash $100 Cash $100
Interest income $ Interest income $100
Cash $1,000 Cash $1,000
Loan receivable $1,000 Unrealized loss - income
Loan receivable $1,005

32. Loans receivable example
IFRS:
Similar to US GAAP, Skydivers can elect to use the FVO or carry the loan at amortized cost. However, an additional option is open to Skydivers. The receivable may be classified as AFS (even though the intent is not to sell or dispose of it). This means that it would be measured at fair value at each balance sheet date with gains and losses recognized in OCI.

33. Loans receivable example
AFS
January 5, 2010
Loan receivable (AFS) $1,000
Cash $1,000
December 31, 2010
Cash $100
Interest income $100
Loan receivable (AFS) $10
Unrealized gain – OCI $10
December 31, 2011(assuming no impairment)
Unrealized loss – OCI $5
Loan receivable $5
December 31, 2012
Cash $1,000
Unrealized loss – OCI
Loan receivable (AFS) $1,005

34. Derecognition US GAAP IFRS
Guidance stipulates when a financial asset should be recognized and derecognized.
Similar

35. Derecognition
US GAAP
Requires derecognition of financial assets where effective control has been surrendered. This would normally be the case when there is legal isolation (i.e., the assets are physically and legally separate from the entity).
There are three criteria that must be met before an asset is derecognized — see next slide.
IFRS
Derecognition considers both transfers of risk and rewards and, as a secondary test, control (if the transferor continues to collect and service the assets).
The control test requires that three conditions be met before an asset is derecognized — see next slide.

36. Derecognition US GAAP IFRS Asset derecognition criteria:
There is legal isolation of the instruments from the transferor.
The transferee has the right to pledge or exchange receiving assets.
Transferor does not maintain effective control over the transferred assets.
IFRS
Asset derecognition criteria:
The transferor has no obligation to pay any amounts above and beyond what it collects from the original customer.
The transferor may not sell the instruments to anyone else.
The transferor must remit the amounts collected without material delay.
There is no legal isolation test.

37. Derecognition example
Scuba Divers Inc. (Scuba) has receivables from an unrelated party with a face value of $1,000. Scuba transfers these receivables to the Fin Company (Fin) for $900. The difference reflects the credit risk. The receivables will continue to be collected by Scuba and deposited to Scuba’s bank account with the cash flows being remitted in total each month-end to Fin. Embedded in the $100 discount is a fee for providing this service. Scuba is not allowed to sell or pledge the receivables to anyone else. There is no agreement to repurchase.
How should Scuba account for the receivables under US GAAP and IFRS?

38. Derecognition example
Example 7 solution:
US GAAP:
The first question is whether legal isolation exists. The receivables remain with Scuba which will continue to collect them (legal entitlement to collect rests with Scuba). In addition, if Scuba went bankrupt, would creditors have access to the cash flows related to the receivables? Since the cash collected on the receivables is initially deposited to Scuba’s bank account, it is commingled with Scuba’s other operating cash flows. It is likely that the legal isolation test may not have been met, although likely that a lawyer would have to provide an opinion. In addition, while it is clear that Scuba is not allowed to pledge the assets, it is not clear that Fin is allowed to pledge them. Therefore, the second test is not met. Because there are no repurchase obligations for Scuba, the third test is met. The assets are, therefore, not derecognized and this would be accounted for as a secured borrowing.
Cash $900
Expense 100
Liability $1,000

39. Derecognition example
IFRS:
The first question is whether the risks and rewards of ownership have passed. Since the selling price is fixed, Scuba is no longer at risk for any credit losses. In fact, it has received the $900 already and is under no obligation to repay no matter what happens. Therefore, the risks and rewards have passed.
Because Scuba has retained the contractual rights to receive the cash while at the same time taking on a contractual obligation to pay those cash flows to the transferee, Scuba must assess whether control has passed as a secondary test. Scuba appears to meet the three required criteria: it is under no obligation to pay any more than it collects, Scuba may not resell the receivables to anyone else and Scuba has agreed to remit the money collected in a timely manner. Therefore, it would appear that this would be accounted for as a sale, and thus derecognized.
Cash $900
Loss on sale 100
Accounts receivable $1,000

40. Impairment US GAAP IFRS Similar Similar but FVPL Similar Similar
Financial assets must be reviewed for impairment at the end of each reporting period.
Similar
Trading: There is no need to test for impairment on trading debt and equity securities since all gains and losses are regularly recognized in income.
Similar but FVPL
AFS debt assets: Impairment is measured as the difference between the amortized cost basis and fair value, and impairment related to credit losses is reported in income.
Similar
HTM debt assets: Impairment related to credit losses is reported in income.
Similar
AFS equity assets: Impairment is measured as the difference between the cost basis and fair value and is reported in income. No reversal is permitted.
Similar

41. Impairment AFS debt assets
US GAAP
An entity determines impairment exists if the fair value is less than the amortized cost basis and it is determined to be other than temporary.
Impairment losses are bifurcated between those related to credit losses which are reported in income and those related to all other factors reported in OCI.
There is no reversal of impairment due to credit losses but reversal of impairment losses due to other factors is reported in OCI.
IFRS
An entity looks for objective evidence of impairment.
Impairment losses are reported in income.
If an impairment reversal can be objectively related to an event occurring after the impairment was recognized, it can be reported in income.

42. Impairment AFS equity assets
US GAAP
An entity determines impairment exists if the fair value is less than the cost basis and it is determined to be other than temporary.
IFRS
An entity looks for objective evidence of impairment.

43. Impairment HTM debt assets
US GAAP
An entity determines impairment exists if the fair value is less than the amortized-cost basis and it is determined to be other than temporary.
Impairment losses are measured as the difference between the amortized cost basis and fair value.
Impairment losses are bifurcated between those related to credit losses which are reported in income and those related to all other factors reported in OCI.
There is no reversal of impairment due to credit losses, but reversal of impairment losses due to other factors is accreted in income up to the carrying amount.
IFRS
An entity looks for objective evidence of impairment.
Impairment losses are measured as the difference between the carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
Impairment losses are reported in income.
If an impairment reversal can be objectively related to an event occurring after the impairment was recognized, it can be reported in income.

44. Impairment determination Impairment measurement
Summary chart for impairment determination, measurement, reporting and reversal
Summary of impairment
Impairment determination
Impairment measurement
Impairment reporting
Impairment reversal
Category
US GAAP
IFRS
AFS – debt
If fair value is less than the amortized cost basis and other-than- temporary impairment
If objective evidence of impairment
Amortized cost basis less fair value
Income for impairment due to credit losses
Income
Not permitted
Permitted in income if the reversal can be objectively related to an event occurring after the impairment was recognized
OCI for impairment due to other factors
OCI
AFS – equity
If fair value is less than the cost basis and other-than- temporary impairment
Cost basis less fair value
HTM – debt
Amortized cost basis less fair value
Amortized cost basis less the present value of estimated future cash flows discounted at the original interest rate
Accreted in income up to the carrying value

45. Impairment of AFS debt and equity assets due to credit losses example
The Jumpin’ Jones Company (Jones) has the following investments:
Common shares of Bungee Inc. – accounted for as AFS (carrying value equal to cost of $100)
Bonds of Bridge Inc. – accounted for as AFS (carrying value equal to cost of $100)
At year-end December 31, 2010, the shares are valued at $90 and the bonds at $80. Both are considered to be impaired for both US GAAP and IFRS. At year-end December 31, 2011, the shares are worth $100 and the bonds $95. Assume the values reflect incurred credit losses only and are equal to fair value.
How should Jones account for these investments at both year-end dates under US GAAP and IFRS?

46. Impairment of AFS debt and equity assets due to credit losses example
Example 8 solutions:
US GAAP:
2010
Loss $30
Investments – AFS equity $10
Investments – AFS debt
The loss is recognized in income since this is considered to be an impairment. Otherwise, the decline in value would be reported in OCI.
2011
Investments – AFS debt
Unrealized gain – OCI $25
The recovery of the value on both the debt and equity are never reflected in income. The impairment establishes a new cost base. Since the assets are valued at fair value, the recovery is recognized in OCI.

47. Impairment of AFS debt and equity assets due to credit losses example
IFRS:
2010
Loss $30
Investments – AFS equity $10
Investments – AFS debt
The loss is recognized in income since this is considered to be an impairment. Otherwise, the decline in value would be reported in OCI.
2011
Investments – AFS equity $10
Investments – AFS debt
Unrealized gain – OCI (equity) $10
Reversal of impairment loss – income (debt) 15
The recovery in value of the debt instrument (only) may be reported in income. Since the assets are valued at fair value, the recovery on the equity investment is reported in OCI.

48. Impairment of HTM debt assets example
The Marvelous Mountain Bike Company (Marvelous) invested in a 5%, $100 bond at par. The bond is classified as HTM and at year-end has a fair value of $50. This is partially due to the fact that interest rates have risen to 7% and also due to the fact that the interest and principal may not be collected under the terms of the bond. The present value of the estimated cash flows at year-end using a 5% discount rate is $70.
For US GAAP impairment testing purposes, there is a potential impairment since the fair value is less than the carrying value. Marvelous establishes that there is objective evidence of impairment for IFRS impairment testing purposes. The company determines that the decline in value is other than temporary. Marvelous has no intent to sell the bond.
Prepare the journal entries to reflect any impairment at year-end under both US GAAP and IFRS.

49. Impairment of HTM debt assets example
Example 9 solutions:
US GAAP:
Impairment loss – income $30
Impairment loss – OCI
Bond (HTM) $50
The impairment loss is measured at carrying value less fair value. The amount related to credit losses of $30 (amortized cost basis of $100 less the year end estimated cash flows of $70) is recognized in income. The impairment loss due to the change in interest rate of $20 ($70-$50) is charged to OCI as Marvelous has no intent to sell the bond.
IFRS:
Bond (HTM) $30  
The impairment loss under IFRS is measured at the carrying value less discounted cash flows. The impairment loss under US GAAP is measured at the carrying value less fair value. Under the new impairment rules, however, only the part of this related to the incurred credit loss is recognized in income.

50. Transfers between categories
US GAAP
IFRS
Generally, transfers of financial assets between categories are not allowed, except in limited circumstances.
Similar
FVO: Transfers into and from the FVO categories of assets are not permitted in any circumstances.
Similar
Trading: May not be reclassified to other categories except in limited circumstances, such as an asset no longer being held for sale or classification to loans and receivables.
Similar but FVPL
AFS: Not permitted to be reclassified, except for loans and receivables that meet the same criteria as trading.
Similar
HTM: May be transferred in limited circumstances, but may trigger the “tainting rule,” which could result in the entire portfolio being transferred out of the category and the inability to use the HTM category for two years (SEC registrants only).
Similar
Similar
Loans and receivables: Permitted in limited circumstances.

51. Summary of transfers between categories of financial assets
Category
Reclassification into category allowed?
Reclassification out of category allowed?
FVO No
Trading/FVPL
Yes – in limited circumstances
AFS
HTM
Yes – may trigger tainting rules
Loans and receivables

52. Disclosures US GAAP IFRS
Requires fairly detailed note disclosures, including:
Significance of financial assets for financial position and performance:
Statement of financial position (categories of assets, fair value through profit or loss, reclassification, derecognition, collateral, allowance for credit losses, compound instruments, defaults and breaches)
Statement of comprehensive income (amounts recognized through income and OCI)
Other disclosures (accounting policies, fair value)
There are similar disclosures under fair value, which focus on the quality of the evidence used to determine fair value. Observable inputs to the measurement provide better evidence than unobservable inputs since the former tends to be market based and the latter more judgment driven.
Nature and extent of risks arising from financial assets:
Qualitative disclosures
Quantitative disclosures (credit risk, liquidity risk, market risk)
IFRS
Similar

53. Disclosures
US GAAP
A moderate level of qualitative disclosures is required. Disclosures are more generally included in the management discussion and analysis.
Very specific in what information must be included.
IFRS
A detailed level of qualitative disclosures is required within the body of the financial statements and related footnotes.
Tends to allow more judgment in how much is disclosed.

54. IFRS 9, Financial Instruments, Effective January 1, 2013
Financial assets will be classified (at the portfolio level). Initially, all financial assets will be measured at fair value and subsequently measured at:
Amortized cost if the following criteria are met:
The assets are held within a business model whose objective is to hold the instrument to collect contractual cash flows (business model test). This is evaluated based on fact and not management intent.
The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest (characteristics of the financial asset test).
Fair value:
FVO: At initial recognition, an entity may designate a debt security as measured at FVPL, to address accounting mismatch.
Fair value through OCI (FVOCI): At initial recognition, an entity may irrevocably designate an equity instrument that is not held for trading to be measured at fair value, with subsequent changes in fair value reported in OCI (with no recycling). Dividends are recognized in income.
FVPL: All other instruments, except where the FVOCI option is used.

55. IFRS 9, Financial Instruments
Impairment requirements are unchanged from IAS 39.
Reclassifications will be required when an entity changes its business model but will be prohibited in all other circumstances.

56. Diagram of classification and measurement under IFRS 9

57. Expected timeline for IAS 39 replacement