IFRS 9 allows broader hedge accounting than US GAAP, specifically permitting the designation of net positions (similar to hedging aggregated exposures), hedging foreign currency risk in anticipated business combinations, and hedging non-financial components with non-derivatives. IFRS also permits specific, restricted risk components of non-financial items.
Unlike IFRS 9, US GAAP requires a prospective and a retrospective assessment whenever financial statements are issued or earnings are reported, and at least every three months. IFRS 9 does not permit voluntary dedesignation of a hedge accounting relationship that remains consistent with its risk management objectives.
The hedge accounting requirements in IFRS 9 are optional. If the eligibility and qualification criteria are met, hedge accounting allows an entity to reflect risk management activities in the financial statements by matching gains or losses on hedging instruments with losses or gains on the risk exposures they hedge.
However, while this might lead one to ask what is the difference between GAAP and IFRS, the biggest difference between US GAAP vs IFRS is IFRS standards are principle-based while GAAP is a rule-based framework.
Types of Hedge Accounting
Hedge accounting can be applied in different ways depending on the type of risk being managed. The three main categories are fair value hedges, cash flow hedges, and net investment hedges.
The hedge accounting requirements in IFRS 9 are optional. If the eligibility and qualification criteria are met, hedge accounting allows an entity to reflect risk management activities in the financial statements by matching gains or losses on hedging instruments with losses or gains on the risk exposures they hedge.
Hedge Fund Strategies
HFR categorizes hedge funds into seven strategy types: equity hedge; event-driven; fund of funds; macro; relative value; risk parity; and blockchain (relatively new category comprised of cryptocurrency and infrastructure sub-strategies).
US GAAP is rules-based, while IFRS and Singapore Financial Reporting Standards (SFRS) are principles-based. This affects how revenue, leases, and expenses are reported.
A prime difference between GAAP and IFRS is in how they account for inventory expenses. If you're using GAAP, you can choose either the LIFO (Last-In, First-Out) or FIFO (First-In, First-Out) method for calculating inventory. Whereas IFRS only allows the use of the FIFO method, the LIFO method is strictly prohibited.
The four pillars of IFRS S1 and S2 are governance, strategy, risk management and metrics and targets.
Numerical Example
Company A keeps only one marketable security position. It is a long position in the S&P 500 Index worth $5 million. It decides to hedge the long position by buying a put option position on the S&P 500 worth $1 million and long the 30-year U.S. Treasury for a position worth $2 million.
ASC 815 does not explicitly define a quantitative threshold that would be considered “highly effective”; however, in practice, a hedge is considered highly effective if the change in the hedging instrument's fair value provides offset of at least 80 percent and not more than 125 percent of the change in the fair value ...
The ineffective portion of the gain or loss on the hedging instrument is recognised in the statement of profit or loss. When cash flows relating to the hedged item are reported in profit and loss, amounts in OCI are reclassified ('recycled') to the statement of profit or loss.
In conclusion, the fundamental distinction between how onerous contracts are treated in accounting under IFRS and US GAAP is that the contract must be recognized as a liability under IFRS. However, under US GAAP, just a loss must be recognized.
(b) The hedge accounting requirements in IFRS 9 align hedge accounting more closely with risk management, resulting in more useful information to users of financial statements.
LIFO in Accounting Standards
Under IFRS and ASPE, the use of the last-in, first-out method is prohibited. However, under GAAP, the use of Last-In First-Out is permitted. The inventory valuation method is prohibited under IFRS and ASPE due to potential distortions on a company's profitability and financial statements.
Periodic interest expense is computed using the contractual interest rate. This statement is not true. Under both IFRS and U.S. GAAP, the periodic interest expense for long-term debt should be computed using the effective interest rate, not the contractual interest rate.
No, only publicly traded companies in the U.S. must use GAAP (generally accepted accounting principles). IFRS (International Financial Reporting Standards) is a framework used in the European Union and many countries in Asia and South America.
Does Singapore use IFRS or GAAP? Singapore follows SFRS, which is based on IFRS with modifications for local regulations. It does not use US GAAP.
In this instance, revenue is recognized when all four of the traditional revenue recognition criteria are met: (1) the price can be determined, (2) collection is probable, (3) there is persuasive evidence of an arrangement, and (4) delivery has occurred.
Some Singapore companies use US GAAP when seeking US investment, listing on US stock exchanges, or when their parent company or major investors require US GAAP statements.
The "2 and 20 rule" is a standard hedge fund fee structure: a 2% annual management fee on total assets (AUM) to cover operating costs, plus a 20% performance fee (or incentive fee) on profits generated above a certain benchmark (hurdle rate). This model aims to align manager and investor interests by rewarding success, though it faces pressure due to high fees and inconsistent performance, with mechanisms like high-water marks protecting investors from paying fees on recovering losses.