The accounting standards of US GAAP and IFRS require (1) the classification of financial instruments; (2) their recognition and derecognition in financial statements; (3) the recognition of derivatives on the balance sheet; and (4) their disclosure in the notes to the balance sheet.
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. They include primary financial instruments, as cash, receivables, debt and shares in other entities, as well as derivative financial instruments, such as options, forwards, futures, interest-rate swaps and currency swaps. A financial instrument is classified and measured on initial recognition in accordance with the substance of the contractual arrangement and the respective definition of the instrument.
| Financial Instrument Classification under US GAAP and IFRS | |
| US GAAP Categories | IFRS Categories |
| Held-for-sale (HFS) loans | Debt instruments at amortized cost |
| Held-for-investment (HTI) loans | Debt instruments at fair value through other comprehensive income (FVTOCI) |
| Held-to-maturity (HTM) securities | Equity instruments at fair value through other comprehensive income (FVTOCI) |
| Available-for-sale (AFS) securities | Debt, equity and derivative instruments at fair value through profit or loss (FVTPL) |
| Trading securities | |
Three methods are used to recognize and subsequently measure financial instruments under both US GAAP and IFRS: amortized cost, fair value through other comprehensive income, and fair value through net income. The method used depends on its classification, the nature of the instrument and the purpose it is intended to serve at origination or purchase date.
| Recognition and Measurement under US GAAP and IFRS | |
| Recognition Value | Subsequent Measurement |
| Transaction Price | Amortized cost |
| Transaction Price | Fair value through other comprehensive income |
| Fair Value | Fair value through net income/profit or loss |