Financial instruments
US GAAP versus IFRS
The basics | 29
Standard setting activities
The FASB and the IASB have been engaged in projects to
simplify and improve the accounting for financial instruments.
Recognition and measurement
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments — Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities.
Technical corrections, improvements and clarifications to
that guidance were issued in ASU 2018-03, Technical
Corrections and Improvements to Financial Instruments —
Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities; ASU 2019-04,
Codification Improvements to Topic 326, Financial
Instruments — Credit Losses, Topic 815, Derivatives and
Hedging, and Topic 825, Financial Instruments; and
ASU 2020-01, Investments — Equity Securities (Topic 321),
Investments — Equity Method and Joint Ventures (Topic 323),
and Derivatives and Hedging (Topic 815): Clarifying the
Interactions between Topic 321, Topic 323, and Topic 815.
ASU 2016-01 and ASU 2018-03 are effective for all PBEs.
For all other entities, ASU 2016-01 and ASU 2018-03 are
effective for annual periods beginning after 15 December
2018 and interim periods beginning after 15 December
2019. The amendments to the recognition and
measurement standard in ASU 2019-04 became effective
for fiscal years beginning after 15 December 2019,
including interim periods within those fiscal years. Early
adoption is permitted. ASU 2020-01 is effective for PBEs
for fiscal years beginning after 15 December 2020 and
interim periods within those fiscal years. For all other
entities, it is effective for fiscal years beginning after
15 December 2021 and interim periods within those fiscal
years. Early adoption is permitted.
Liabilities and equity
In August 2020, the FASB issued ASU 2020-06, Debt —
Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging — Contracts in Entity’s Own
Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity. The
ASU simplifies certain areas of the accounting for financial
instruments with characteristics of liabilities and equity. The
ASU eliminates the cash conversion and beneficial
conversion feature models in ASC 470-20 to separately
account for embedded conversion features. Only
conversion features separated under the substantial
premium model in ASC 470-20 and embedded conversion
features bifurcated under ASC 815-15 are accounted for
separately. For contracts in an entity’s own equity, the
guidance eliminates some of the conditions for equity
classification under ASC 815-40-25. For PBEs other than
smaller reporting companies as defined by the SEC as of 5
August 2020, the guidance is effective for annual periods
beginning after 15 December 2021 and interim periods
therein. For all other entities, it is effective for annual
periods beginning after 15 December 2023 and interim
periods therein. Early adoption is permitted in fiscal years
beginning after 15 December 2020. Certain differences
between US GAAP and IFRS will remain after the adoption
of ASU 2020-06.
In addition, the FASB issued a revised proposal for
simplifying the balance sheet classification of debt in
September 2019.
The IASB continues its research project on potential
improvements to (1) the classification of liabilities and equity
in IAS 32, including potential amendments to the definitions
of liabilities and equity in the Conceptual Framework and
(2) the presentation and disclosure requirements for financial
instruments with characteristics of equity, irrespective of
classification. After evaluating feedback on its related
discussion paper that sets out a preferred approach to
classification of a financial instrument, from the perspective
of the issuer, as a financial liability or an equity instrument,
the IASB is expected to decide the direction of the project
before the end of 2020.
In January 2020, the IASB issued amendments to IAS 1 to
clarify the criteria for classifying a liability as either current
or noncurrent. After the adoption of the amendments,
certain differences between IFRS and US GAAP will remain
for the classification of debt arrangements. For example,
the treatment of waivers for covenant violations and share
settlement features may result in different classification
conclusions. The amendments to IAS 1 are effective for
annual periods beginning on or after 1 January 2023. The
amendments must be applied retrospectively in accordance
with IAS 8. Early adoption is permitted.
Impairment
The FASB’s ASU 2016-13, Financial Instruments — Credit
Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, issued in June 2016, differs
significantly from the three-stage impairment model in
IFRS 9, as discussed above. As amended, ASU 2016-13
became effective in 2020 for calendar-year entities that are
SEC filers, excluding entities eligible to be smaller reporting
companies as defined by the SEC, and effective for all other
entities in fiscal years beginning after 15 December 2022
(i.e.,1 January 2023 for calendar-year entities), including
interim periods within those fiscal years. Early adoption is
permitted for all entities.