IFRS 9 vs US GAAP: How ASC 320, ASC 321 and ASC 326 Actually Differ

IFRS 9.4.1.1 requires an entity to classify financial assets on the basis of both the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. IFRS 9.4.1.2 then sends an asset to amortised cost only if it is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. IFRS 9.4.1.2A sets the same cash flow condition for FVOCI but pairs it with a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.

Two things follow that people underuse. The business model condition and the cash flow condition are cumulative, so failing either one puts the asset at fair value through profit or loss under IFRS 9.4.1.4. And the business model is assessed at a level above the individual instrument, so the same bond can be at amortised cost in one book and at FVOCI in another within the same group.

IFRS 9.B4.1.2A says the business model refers to how an entity manages its financial assets in order to generate cash flows, and that the assessment is not performed on the basis of scenarios the entity does not reasonably expect to occur, such as worst case or stress case scenarios. It also says explicitly that if cash flows are realised differently from expectation, for example because the entity sold more assets than it expected, that does not give rise to a prior period error.

IFRS 9.B4.1.3 confirms that a hold-to-collect business model does not require every instrument to be held to maturity, and B4.1.3A allows sales driven by an increase in credit risk irrespective of their frequency and value, because credit quality is relevant to the entity's ability to collect. B4.1.3B extends that to sales made for other reasons, such as managing credit concentration risk, where those sales are infrequent even if significant in value, or insignificant in value both individually and in aggregate.

This is the part that gets argued in every audit, and it is worth being honest about why. The standard sets the test in words with no number behind them. There is no threshold for infrequent and no threshold for insignificant, and IFRS 9 deliberately declines to supply one. What it supplies instead is a direction of travel: the more you sell, and the less those sales relate to credit, the harder it is to keep calling the model hold-to-collect.

Two paragraphs carry most of the weight of this difference. B4.1.2 says the business model is determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective, that it does not depend on management's intentions for an individual instrument, and that a single entity may have more than one business model, so classification need not be determined at the reporting entity level.

B4.1.2B is the sentence to quote at anyone who thinks the two frameworks are the same thing with different labels. An entity's business model for managing financial assets is "a matter of fact and not merely an assertion", typically observable through the activities the entity undertakes, assessed on all relevant evidence available at the date of the assessment rather than on any single factor. The evidence B4.1.2B goes on to list includes how the performance of the business model and the assets within it are evaluated and reported to key management personnel, the risks that affect performance and how they are managed, and how managers are compensated.

ASC 320 contains no equivalent sentence, and it does not need one, because under ASC 320-10-25-1 the assertion is the classification. That single difference is why an IFRS 9 classification file that consists only of a policy memo is incomplete, and an ASC 320 file that consists only of a policy memo can be complete.

ASC 320-10-25-1 requires an entity to classify debt securities at acquisition into one of three categories. Trading, if the security is acquired with the intent of selling it within hours or days, although an entity is not precluded from classifying as trading a security it plans to hold for a longer period. Held-to-maturity, only if the reporting entity has the positive intent and ability to hold those securities to maturity. Available-for-sale, for debt securities not classified as trading or as held-to-maturity.

Read that list next to IFRS 9.4.1.1 and the difference in evidence becomes obvious. Nothing in ASC 320-10-25-1 asks what the contractual cash flows look like, and nothing asks how the portfolio behaved last year. The classification is a decision recorded at acquisition, and it is tested by asking whether that decision was honestly held at that date, not by asking what the entity did afterwards. The word positive in positive intent and ability is doing the work: an absence of intention to sell is not enough.

Amendments to the Classification and Measurement of Financial Instruments, issued in May 2024, amended paragraphs 3.1.2, 5.7.5 and 7.2.47 to 7.2.49 and added paragraphs B3.1.2A, B3.3.8 to B3.3.10, B4.1.8A, B4.1.10A and B4.1.16A. IFRS 9.7.1.12 makes them effective for annual reporting periods beginning on or after 1 January 2026, with earlier application permitted. The companion amendments to IFRS 7 added paragraphs 11A, 11B and 20B to 20D.

Transition runs through IFRS 9.7.2.47 to 7.2.49. The amendments are applied retrospectively in accordance with IAS 8, but IFRS 9.7.2.48 does not require prior periods to be restated and permits restatement only where it is possible without hindsight. The practical work in the first affected set of accounts is therefore the assessment and the new disclosures, not the comparatives.

B4.1.8A sets out how to think about the elements of interest when testing SPPI. The assessment of interest focuses on what an entity is being compensated for, rather than how much compensation it receives, although the amount may indicate the entity is being compensated for something other than basic lending risks and costs. It then states plainly that contractual cash flows are inconsistent with a basic lending arrangement if they are indexed to a variable that is not a basic lending risk or cost, for example the value of equity instruments or the price of a commodity, or if they represent a share of the debtor's revenue or profit, even where such terms are common in the market in which the entity operates.

The last clause is the one to notice. Market practice is not a defence. A lender operating in a sector where revenue-linked pricing is normal cannot use that normality to argue the cash flows are basic. Under US GAAP the same feature does not lead anywhere, because ASC 320 has no cash flow characteristics test at all; the feature would instead be examined as a possible embedded derivative under ASC 815-15, which is unit 8.

B4.1.10A is the paragraph that resolves the sustainability-linked loan question. Where a contingent feature changes the cash flows in a way that is consistent with a basic lending arrangement both before and after the change, but the nature of the contingent event itself does not relate directly to changes in basic lending risks and costs, the standard gives the example of an interest rate that adjusts if the debtor achieves a contractually specified reduction in carbon emissions. In that case the asset meets SPPI if, and only if, in all contractually possible scenarios the contractual cash flows would not be significantly different from those on an otherwise identical instrument without the contingent feature.

The test can sometimes be answered qualitatively, and where it is clear with little or no analysis that the cash flows are not significantly different, B4.1.10A says no detailed assessment is needed. In other cases a quantitative assessment is required. That is a real workload item on a large sustainability-linked book, and it is the first time the standard has told preparers how to do it.

B4.1.16A defines non-recourse features for the first time in the operative text: a financial asset has non-recourse features if an entity's ultimate right to receive cash flows is contractually limited to the cash flows generated by specified assets, so that the entity is primarily exposed to those assets' performance risk rather than the debtor's credit risk. B4.1.17 then says that non-recourse features do not in themselves preclude SPPI, but the creditor has to look through to the link between the underlying assets or cash flows and the contractual cash flows being classified, and to consider how that link is affected by other arrangements such as subordinated debt or equity issued by the debtor.

For project finance, infrastructure lending and asset-backed positions this is the paragraph that decides whether the exposure is a loan at amortised cost or an equity-like return at fair value through profit or loss. There is no US GAAP counterpart, because the loan would be at amortised cost under ASC 310 regardless and the question would only surface through ASC 815 or through the beneficial interest guidance for securitised positions.

B3.3.8 introduces an accounting policy option to derecognise a financial liability settled through an electronic payment system before the cash is actually delivered, where specified conditions are met, and B3.3.9 explains the settlement risk condition. B3.3.10 requires the option to be applied consistently to all settlements made through the same system.

This sounds administrative and is not. It decides whether a corporate's year end cash and trade payables are both grossed up or both released when payment instructions have gone out but the money has not landed. On a large payables run over a period end the effect on reported net debt is not trivial, and the option means two otherwise identical IFRS reporters can present it differently. US GAAP has no equivalent option; the analysis stays a legal extinguishment question.

The disclosure changes are where a reader can see the difference between the frameworks most easily, because they have no US GAAP mirror at all.

IFRS 7.11A now requires, for each class of equity investment designated at FVOCI, which investments were designated, the reasons for using the presentation alternative, fair value at the reporting date, dividends split between investments derecognised in the period and those still held, transfers of the cumulative gain or loss within equity with the reason for them, and the fair value gain or loss presented in OCI split the same way. IFRS 7.11B adds, for investments derecognised in the period, the reasons for disposing, the fair value at derecognition, the cumulative gain or loss on disposal and any transfers within equity relating to them.

IFRS 7.20B and 20C require disclosure, by class of financial asset at amortised cost or FVOCI and by class of financial liability at amortised cost, of contractual terms that could change the contractual cash flows on the occurrence or non-occurrence of a contingent event that does not relate directly to basic lending risks and costs: a qualitative description of the event, quantitative information about the possible changes to cash flows including the range, and the gross carrying amount or amortised cost of the instruments affected. IFRS 7.20D gives the obvious example, a class of financial liabilities whose cash flows change if the entity achieves a reduction in its carbon emissions.

ASC 320-10-25-1(b) is one sentence: investments in debt securities not classified as trading securities or as held-to-maturity securities shall be classified as available-for-sale securities. ASC 320-10-35-1(b) then measures them at fair value, with unrealised holding gains and losses excluded from earnings and reported in other comprehensive income until realised, subject to the fair value hedge and portfolio layer method exceptions.

Note what is absent. There is no test to pass, no evidence to assemble and no assertion to defend. Available-for-sale is the category a security falls into when the other two do not apply, and EY's guidance describes it exactly that way: the default or residual security classification.

IFRS 9.4.1.2A puts an asset at FVOCI only where the business model's objective is achieved by both collecting contractual cash flows and selling financial assets, and the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Both conditions, not either.

IFRS 9.5.7.10 then sets the presentation. A gain or loss on an FVOCI asset is recognised in OCI, except for impairment gains or losses and foreign exchange gains and losses, until the asset is derecognised or reclassified. On derecognition the cumulative amount previously recognised in OCI is reclassified from equity to profit or loss as a reclassification adjustment. IFRS 9.5.7.11 states the consequence in one line: the amounts recognised in profit or loss are the same as they would have been if the asset had been measured at amortised cost.

That is the sentence to hold on to. FVOCI debt is an amortised cost income statement bolted to a fair value balance sheet. The available-for-sale outcome under ASC 320 arrives at broadly the same place, but it gets there because unrealised gains and losses are excluded from earnings rather than because the standard sets out to replicate amortised cost.

ASC 320-10-25-1(c) permits held-to-maturity classification only if the reporting entity has the positive intent and ability to hold those securities to maturity, and ASC 320-10-35-1(c) then measures them at amortised cost. EY's guidance puts the bar plainly: a positive intent and ability to hold a security to maturity is different from the mere absence of an intent to sell, and an entity uncertain of its intention should not use the classification.

Amortised cost measurement means the fair value never enters the balance sheet or OCI. It appears in the fair value disclosures and in the gross unrealised loss table, and nowhere else. For a bank that bought long-dated securities before a rate rise, that is the difference between an equity balance that reflects the rate move and one that does not.

The discipline that makes the category workable sits in the subsequent measurement section, not the recognition section, and this is the reference most secondary guides get wrong. ASC 320-10-35-8 says a sale or transfer of a held-to-maturity security for a reason other than those in ASC 320-10-25-6, 25-9 and 25-14 calls into question, or taints, the entity's intent about all securities remaining in the category, because the entity makes the same assertion about every one of them. ASC 320-10-35-9 then requires that where the sale represents a material contradiction of the stated intent, or where a pattern of such sales has occurred, the remaining held-to-maturity securities are reclassified to available-for-sale in the reporting period in which the sale occurred.

ASC 320-10-35-7 deals with what happens next, and it is a judgement rather than a rule: after securities are reclassified in response to a taint, judgement is required in determining when circumstances have changed such that management can assert with a greater degree of credibility that it now has the intent and ability to hold debt securities to maturity.

These are the exceptions, and they are narrower than people remember. ASC 320-10-25-6 lists six changes in circumstances that do not taint: evidence of significant deterioration in the issuer's creditworthiness, a change in tax law eliminating or reducing the tax-exempt status of the interest, a major business combination or major disposition necessitating the sale to maintain the existing interest rate or credit risk position, a change in statutory or regulatory requirements significantly modifying what constitutes a permissible investment or the maximum level of certain investments, a significant increase by the regulator in the industry's capital requirements causing the entity to downsize, and a significant increase in the risk weights used for regulatory risk-based capital purposes.

ASC 320-10-25-9 adds a general exception for events that are isolated, non-recurring, unusual for the reporting entity and that could not have been reasonably anticipated, all four conditions together. EY's assessment of how wide that gate is: other than remote scenarios, very few events would meet all of them.

ASC 320-10-25-14 covers sales that are treated as maturities: a sale near enough to the maturity or probable call date that interest rate risk is substantially eliminated as a pricing factor, for example within three months, or a sale after the entity has already collected a substantial portion of the principal outstanding at acquisition, being at least 85 per cent.

Read the list as a whole and the shape of it is clear. Selling because you need liquidity is not on it. Selling because rates moved is not on it. Those are exactly the reasons an entity under funding pressure would want to sell, which is why the category behaves well in calm conditions and becomes a trap in a stress.

IFRS 9.5.7.5 permits an entity, at initial recognition, to make an irrevocable election to present in OCI subsequent changes in the fair value of an investment in an equity instrument within the scope of the standard that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies. IFRS 9.5.7.6 confirms that dividends on such an investment still go to profit or loss, subject to the recognition conditions in IFRS 9.5.7.1A.

IFRS 9.B5.7.1 is the paragraph that makes this different from every other OCI category in IFRS. The election is made instrument by instrument, share by share. Amounts presented in OCI shall not be subsequently transferred to profit or loss, although the entity may transfer the cumulative gain or loss within equity. Dividends are recognised in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment.

So there is no recycling event. Not on sale, not on impairment, not on liquidation of the investee. An entity can hold a stake for twenty years, sell it for four times what it paid, and report nothing in profit or loss beyond the dividends it collected along the way.

ASC 321-10-35-1 is short and admits no alternative: except as provided in ASC 321-10-35-2, investments in equity securities shall be measured subsequently at fair value in the statement of financial position, and unrealised holding gains and losses for equity securities shall be included in earnings.

There is no OCI presentation option for equity securities under US GAAP and there has not been one since ASU 2016-01 removed equities from the available-for-sale population. A US GAAP preparer holding a listed strategic stake has one answer available to it, and that answer puts the market's opinion of that stake into its own income statement every quarter.

The one relief is the measurement alternative. An entity may elect to measure an equity security without a readily determinable fair value, that does not qualify for the ASC 820 net asset value practical expedient, at cost minus impairment. If the entity identifies observable price changes in orderly transactions for an identical or a similar investment of the same issuer, it measures the security at fair value as of the date the observable transaction occurred. The election is made for each investment separately, and the entity reassesses each reporting period whether the investment still qualifies.

IFRS 9 has nothing like this. There is no cost measurement for equity investments at all. An unquoted stake is measured at fair value, and the only choice is whether the movements go to profit or loss or to OCI. For a corporate holding a portfolio of small unquoted investments, that difference in workload is significant: US GAAP allows a cost basis adjusted only for observed transactions, IFRS requires a valuation every reporting date.

IFRS 9.4.1.5 permits an entity, at initial recognition, to irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency, the accounting mismatch, that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.

That is the only condition, and it is a real one. An IFRS preparer cannot designate an asset at fair value because fair value seems more relevant, or because it simplifies the systems, or to avoid running the SPPI test. There has to be an identified inconsistency and the designation has to reduce it. IFRS 9.4.2.2 sets a slightly wider gate for liabilities, adding the case where a group of financial liabilities, or financial assets and liabilities together, is managed and its performance evaluated on a fair value basis.

US GAAP is more permissive. ASC 825-10-25-1 makes the fair value option available on an instrument-by-instrument basis for eligible items without requiring an accounting mismatch to be demonstrated. KPMG's comparison puts it neutrally: the eligibility criteria and the financial assets to which the fair value option can be applied differ from IFRS in certain respects. In practice the difference is that a US GAAP entity has a policy choice where an IFRS entity has a test.

IFRS 9.5.7.7(a) requires the amount of change in the fair value of a designated financial liability that is attributable to changes in the credit risk of that liability to be presented in OCI, with the remainder in profit or loss. IFRS 9.5.7.8 reverses that where the split would create or enlarge an accounting mismatch in profit or loss, in which case everything goes to profit or loss. IFRS 9.5.7.9 removes loan commitments and financial guarantee contracts from the OCI treatment entirely.

IFRS 9.B5.7.9 is the sentence that creates the difference. Amounts presented in OCI shall not be subsequently transferred to profit or loss, although the entity may transfer the cumulative gain or loss within equity. The wording is deliberately identical to B5.7.1 on equity investments, and the effect is the same. There is no recycling event at any point in the life of the instrument, including derecognition.

US GAAP puts the own credit amount in OCI as well, so the two frameworks look the same until the liability is settled. At that point US GAAP reclassifies the accumulated amount to earnings. KPMG's comparison states the difference in one line: unlike IFRS Accounting Standards, the amount presented in OCI is reclassified to profit or loss on derecognition.

IFRS 9.4.3.2 is one sentence with a large effect. If a hybrid contract contains a host that is an asset within the scope of the standard, the entity applies the classification requirements in IFRS 9.4.1.1 to 4.1.5 to the entire hybrid contract. No separation, no closely related assessment, no separate derivative on the balance sheet.

IFRS 9.4.3.3 keeps bifurcation alive for everything else. Where the host is not an asset in scope, typically a financial liability or a non-financial contract, an embedded derivative is separated if, and only if, its economic characteristics and risks are not closely related to those of the host, a separate instrument with the same terms would meet the definition of a derivative, and the hybrid contract is not measured at fair value through profit or loss.

The reason for the split is worth understanding rather than memorising. IFRS 9 already has a test that looks at the contractual cash flows of an asset, which is SPPI. A conversion option, the kind of leverage IFRS 9.B4.1.9 describes, or a commodity-linked return will fail SPPI on its own, sending the whole instrument to fair value through profit or loss under IFRS 9.4.1.4. Bifurcating as well would be doing the same job twice.

US GAAP kept the older architecture. ASC 815-15-25-1 sets the same three conditions for separation, clearly and closely related, would meet the definition of a derivative standing alone, and the hybrid not measured at fair value with changes in earnings, and it applies them to all hybrid contracts, financial asset hosts included. KPMG states the difference directly: unlike IFRS Accounting Standards, the US GAAP guidance on separation of embedded derivatives also applies to all hybrid contracts with financial asset hosts.

KPMG also notes that the US GAAP guidance on what clearly and closely related means differs from IFRS in certain respects, so even for liability and non-financial hosts, where both frameworks bifurcate, the answers do not always agree.

IFRS 9.5.5.1 puts a loss allowance on financial assets measured under IFRS 9.4.1.2 or 4.1.2A, lease receivables, contract assets, loan commitments and financial guarantee contracts within the impairment requirements. IFRS 9.5.5.5 requires the allowance to be measured at 12-month expected credit losses where credit risk has not increased significantly since initial recognition, and IFRS 9.5.5.3 moves it to lifetime expected credit losses where it has.

IFRS 9.5.5.2 handles the FVOCI case and is the paragraph most often stated loosely. The impairment requirements apply to FVOCI assets in the same way, but the loss allowance is recognised in OCI and shall not reduce the carrying amount of the asset in the statement of financial position. The asset stays at fair value. The allowance changes the income statement, not the balance sheet.

ASC 326-20 applies the current expected credit loss model to financial assets measured at amortised cost, including held-to-maturity debt securities and loans. The allowance covers expected credit losses over the contractual life from initial recognition, and there is no 12-month step, no significant increase in credit risk trigger and no staging.

The consequence people underestimate is what this does to growth. An entity originating a large volume of good quality long-dated loans books a lifetime allowance on all of them in the period of origination, so a strong lending year depresses reported earnings on the US side in a way it does not on the IFRS side. That is not a defect. It is the model working as designed, and it was the FASB's answer to the criticism that the incurred loss model recognised losses too late.

For available-for-sale debt securities US GAAP runs a separate model, and it is not CECL. The steps, as KPMG sets them out, are these. First, assess impairment: an available-for-sale debt security is impaired when its fair value falls below its amortised cost basis. Second, ask whether management intends to sell, or will more likely than not be required to sell before recovery of the amortised cost basis. If either applies, any existing allowance is written off and the amortised cost basis is written down to fair value through earnings. Third, if neither applies, determine whether the decline is a credit loss and record only the credit portion through an allowance.

The measurement is a discounted cash flow comparison under ASC 326-30-35-6, comparing the present value of cash flows expected to be collected against the amortised cost basis, and ASC 326-30-35-2 caps the allowance at the amount by which fair value is below amortised cost. That cap is the fair value floor.

Set that beside IFRS 9.5.5.2 and the shape of the difference appears. Both frameworks put the credit charge in profit or loss and neither reduces the carrying amount, because the asset is at fair value in both. But IFRS 9 measures a full 12-month or lifetime expected loss on an FVOCI security regardless of whether fair value has fallen, and ASC 326-30 does not even start until fair value is below amortised cost, then caps the answer at that shortfall. On a security trading above amortised cost, IFRS 9 carries an allowance and US GAAP carries none.

IFRS 9.4.4.1 is the whole rule for assets: when, and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets in accordance with IFRS 9.4.1.1 to 4.1.4. IFRS 9.4.4.2 deals with liabilities and says only that an entity shall not reclassify any financial liability. It is worth being precise about that, because a good deal of secondary material attributes the equity and fair value option restrictions to 4.4.2. They come from elsewhere: the IFRS 9.5.7.5 election and the IFRS 9.4.1.5 designation are both irrevocable, and neither category is classified under 4.1.1 to 4.1.4, so 4.4.1 never reaches them.

IFRS 9.B4.4.3 closes off the obvious workarounds. A change in intention related to particular financial assets, even in circumstances of significant changes in market conditions, is not a change in business model. Nor is the temporary disappearance of a market, or a transfer of assets between parts of the entity with different business models.

IFRS 9.5.6.1 applies reclassification prospectively from the reclassification date and prohibits restating previously recognised gains, losses including impairment, or interest. The mechanics then depend on the direction of travel.

Amortised cost to fair value through profit or loss: fair value is measured at the reclassification date and the difference from the previous amortised cost goes to profit or loss (IFRS 9.5.6.2). Fair value through profit or loss to amortised cost: the fair value at the reclassification date becomes the new gross carrying amount (IFRS 9.5.6.3). Amortised cost to FVOCI: the difference goes to OCI, and the effective interest rate and the ECL measurement are not adjusted (IFRS 9.5.6.4). FVOCI to amortised cost: the cumulative OCI amount is removed from equity and adjusted against the fair value, so the asset is carried as though it had always been at amortised cost (IFRS 9.5.6.5).

The last one is the elegant part of the model and the one most likely to be got wrong in a conversion. Nothing goes to profit or loss. The OCI reserve is used to unwind the fair value adjustment on the asset itself.

ASC 320-10-35-10 accounts for transfers from or into the trading category at fair value. For a security transferred out of trading, the unrealised holding gain or loss at the transfer date has already been recognised in earnings and is not reversed. For a security transferred into trading, the portion of the unrealised holding gain or loss not previously recognised in earnings is recognised immediately. ASC 320-10-35-12 adds that, given the nature of a trading security, transfers into or from that category should be rare.

Movement out of held-to-maturity is governed by the tainting rules in unit 5 rather than by a transfer rule, and that is the real asymmetry. IFRS 9 has one gate, the business model, and no penalty behind it. US GAAP has a permissive transfer mechanism for two of its three categories and a punitive one for the third.

ISA 540 (Revised) paragraph 13 requires the auditor, when obtaining an understanding of the entity and its environment, to understand matters relating to the entity's accounting estimates, including how management identifies the need for them, the method, assumptions and data used, and the controls over the process. ISA 500 paragraph 6 requires the auditor to design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence.

On an IFRS 9 file those two requirements land in a specific place. IFRS 9.B4.1.2B states that the business model is a matter of fact and not merely an assertion, typically observable through the activities the entity undertakes. That gives the auditor a defined evidence target: the sales history, the management reporting, the risk management activity and the compensation arrangements the paragraph lists. A classification memo that describes the policy without any of that is not evidence of the fact the standard is asking about.

The equivalent US GAAP file is genuinely different. Under ASC 320-10-25-1 the classification is an intent assertion made at acquisition, so the memo is closer to being the evidence, and the auditor's work moves towards ability to hold, which is a liquidity and capital question rather than a behavioural one.

Paragraph 18 requires further audit procedures to be responsive to the assessed risks at the assertion level, taking account of why the risk was assessed as it was. Paragraphs 22 to 26 then set out what testing how management made the estimate actually involves: the appropriateness of the method, the reasonableness of the significant assumptions, the relevance and reliability of the data, and whether the point estimate and related disclosures are reasonable.

The highest-risk population on these files is unquoted equity. Under IFRS 9 there is no cost measurement available, so every unquoted holding needs a fair value at every reporting date. Under ASC 321-10-35-2 a US entity can elect cost less impairment adjusted for observable price changes, which moves the audit question from valuation to completeness of observed transactions. Two frameworks, two entirely different sets of procedures on the same shareholding.

What to look for is unchanged either way: single-source pricing, broker quotes that have not moved in several periods, models never calibrated back to an actual transaction, and a valuation that has tracked the entity's budget more closely than the market.

Paragraph 32 requires the auditor to review the judgements and decisions made by management in making accounting estimates to identify indicators of possible management bias, and states that such indicators do not themselves constitute misstatements for the purpose of drawing conclusions on individual estimates. Paragraph 33 requires an overall evaluation, based on the audit procedures performed and the audit evidence obtained, of whether the estimates and related disclosures are reasonable or misstated.

Three fact patterns in this area are indicators worth the paragraph 32 review on their own. A business model change under IFRS 9.4.4.1 dated so that a fair value movement falls on the convenient side of the reclassification date. A held-to-maturity sale characterised as an ASC 320-10-25-9 isolated, non-recurring and unusual event that could not have been reasonably anticipated, where the event was a funding need. And an ECL post-model overlay that moves in the opposite direction to the underlying credit data.