Comparison chart: GAAP to IFRS

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Two rules relating to valuation of derivatives and asset securitization may pose formidable challenges to banks making the switch from U.S. GAAP to IFRS.

Possible challenges companies will face
U.S. GAAP
vs.
IFRS

Valuation of derivatives

“IFRS will make it impossible for banks to record certain earnings derived from pricing models that don’t use observable market values.”
─Ken Marshall, Ernst & Young Americas leader for IFRS.
  • New guidance for determining valuation was introduced by the Financial Accounting Standards Board (FASB) in 2006 with financial accounting standard 157.
  • Standard 157 guides firms to determine fair value for derivatives in all scenarios.
  • Standard 157 essentially removes an Enron-inspired rule that prohibited banks from recording Day One gains or losses on derivative instruments whose fair value was derived from models that used unobservable data.
  • Day One prohibition is upheld – banks cannot record Day One gains or losses on derivative instruments whose fair value was derived from models that used unobservable data.
  • Banks must book a derivative trade at its actual transaction price.
  • Asset value can only be changed based on an observable value in the market.

Securitized assets(Asset-backed securities)

“(With IFRS in place)…Such a stark shift in the accounting treatment of securitization vehicles would fundamentally alter the business of creating and selling bonds and other asset-backed securities.”
─Ken Marshall
  • Allows firms to absorb first losses without having to bring the issuing vehicle on the balance sheet.
  • If the firm faces the risk of the first loss on the assets of the issuing vehicle, the issuing vehicle typically must be consolidated onto its balance sheet.

One last word…
While the change to IFRS will take some time, banks should not delay their conversion efforts. The expected move to a new standard will come with a provision for at least a one-year retroactive restatement. So if U.S. reporting firms are required to present their books under IFRS by a specific year, they’ll also have to show the prior year’s accounts under the same standard. Bottom line, make your move to IFRS sooner rather than later.