How to account for financial instruments under IFRS and US GAAP: Classification, measurement, and impairment
- Graziano Stefanelli
- 5 hours ago
- 4 min read
Financial instruments represent one of the most complex and scrutinized areas of accounting, given their prevalence across industries and the potential for significant volatility in reported earnings. Both IFRS (IFRS 9) and US GAAP (primarily ASC 320, 825, and 326) offer detailed frameworks governing the classification, measurement, and impairment of financial assets and liabilities. While both standards seek to present a fair view of an entity's financial risk exposure and performance, there are key differences in how instruments are categorized, how changes in value are recognized, and how credit losses are estimated over time.
Financial instruments must be classified upon initial recognition based on business model and contractual characteristics.
Under IFRS 9, classification of financial assets is based on:
Business model: How the entity manages the asset (e.g., to collect contractual cash flows, to sell, or both).
Cash flow characteristics: Whether the asset's contractual cash flows are solely payments of principal and interest (SPPI test).
This results in three primary categories:
Amortized cost
Fair value through other comprehensive income (FVOCI)
Fair value through profit or loss (FVTPL)
US GAAP uses a similar but less flexible classification scheme, including:
Held-to-maturity (HTM): Debt instruments with intent and ability to hold to maturity, measured at amortized cost.
Available-for-sale (AFS): Debt instruments measured at FVOCI.
Trading securities: Measured at fair value with changes in P&L.
Equity instruments under US GAAP are generally measured at fair value through net income, unlike IFRS, which allows FVOCI without recycling for certain equities.
Classification | IFRS 9 | US GAAP |
Debt instruments | Amortized cost, FVOCI, or FVTPL | HTM, AFS, or trading |
Equity instruments | FVTPL or FVOCI (no recycling) | FVTPL (FVOCI not permitted) |
Classification approach | Based on business model + SPPI | Based on management intent and ability |
Measurement depends on classification and may be at amortized cost or fair value.
After initial recognition at fair value plus transaction costs (unless FVTPL), financial assets are measured as follows:
Amortized cost: Interest income using effective interest method, adjusted for impairment.
FVOCI: Measured at fair value; interest and impairment in profit or loss, fair value changes in OCI.
FVTPL: All changes in fair value recognized in profit or loss.
US GAAP uses similar measurements for debt securities. However, for equity investments, FVOCI is not allowed—fair value changes must be recognized in earnings, unless using the measurement alternative (for non-marketable securities without readily determinable fair value).
Impairment is based on expected credit losses under both frameworks, with different models.
Both IFRS 9 and US GAAP (ASC 326, known as CECL) now use expected credit loss (ECL) models to estimate impairment, moving away from incurred loss models that delayed recognition.
Under IFRS 9:
Uses a three-stage model:
Stage 1: Performing assets—12-month expected credit losses.
Stage 2: Deteriorated credit risk—Lifetime ECL.
Stage 3: Credit-impaired—Lifetime ECL, with interest income based on net carrying amount.
Applies to:
Loans and receivables
Debt instruments at amortized cost or FVOCI
Lease receivables, trade receivables
Under US GAAP:
CECL model: All financial assets measured at amortized cost must recognize lifetime expected losses from initial recognition.
Simpler model but results in earlier and often larger impairments than IFRS, especially for new assets.
Impairment approach | IFRS 9 (3-stage) | US GAAP (CECL) |
Initial recognition | 12-month ECL | Lifetime ECL |
Movement based on credit risk | Yes (stages 1–3) | No stages |
Scope | Amortized cost and FVOCI assets | Amortized cost only |
Equity instruments | Not subject to ECL | Not subject to CECL |
Financial liabilities are measured using different rules for fair value changes.
Most financial liabilities are measured at amortized cost under both IFRS and US GAAP, except when designated as FVTPL.
IFRS requires that changes in own credit risk (i.e., changes in fair value due to changes in the entity's own creditworthiness) be recognized in OCI for liabilities measured at FVTPL.
US GAAP allows entities to elect the fair value option, but all fair value changes, including own credit, go through net income unless applying specific guidance (e.g., ASC 825-10).
Derivatives and hedging instruments are accounted for at fair value.
Under both frameworks:
Derivatives (options, forwards, swaps) are measured at fair value.
Changes in value are recorded in profit or loss, unless part of a qualifying hedge relationship.
IFRS 9 introduced a more principles-based hedge accounting model, allowing alignment with risk management strategy.
US GAAP (ASC 815) remains more rules-based, with specific requirements on hedge designation, effectiveness testing, and documentation.
Disclosure requirements promote transparency on risks and measurement uncertainties.
Both IFRS and US GAAP require extensive disclosures in financial statements related to:
Categories and carrying amounts of financial instruments
Fair value measurement hierarchy (Level 1, 2, 3)
Risk exposure (credit, liquidity, market)
Sensitivity analyses
Off-balance sheet exposures (e.g., guarantees, commitments)
IFRS 7 governs most disclosure requirements under IFRS, while ASC 825 and ASC 815 apply under US GAAP.
Key differences between IFRS and US GAAP for financial instruments.
Topic | IFRS 9 / IFRS 7 | US GAAP (ASC 320, 825, 326, 815) |
Classification basis | Business model + SPPI | Management intent and instrument type |
FVOCI for equities | Permitted (no recycling to P&L) | Not permitted |
Impairment model | 3-stage expected credit loss | Lifetime expected loss (CECL) |
Impairment triggers | Credit risk deterioration | No deterioration needed—lifetime ECL upfront |
Fair value option for liabilities | OCI for own credit risk | P&L for all components |
Hedge accounting model | Principles-based and risk-aligned | Rules-based with strict qualifications |
The accounting for financial instruments under IFRS and US GAAP continues to evolve, especially in light of financial crises and global regulatory reforms. For entities operating across jurisdictions—or preparing to issue IFRS and US GAAP-compliant reports—careful alignment of classification policies, valuation processes, and impairment systems is required to ensure consistent, comparable, and audit-ready results.
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