Borrowed rules
What do you do when no IFRS deals with a transaction, when can you borrow rules from US GAAP, and when does an agenda decision rule that out?
Kinvara Software Ltd is the Irish subsidiary of a US software group. It prepares IFRS financial statements, but every month it also reports to its parent in US GAAP. Three items in this year's accounts are causing arguments. The group finance team's position is simple: where IFRS has no rule, use ours. IAS 8 allows that, they say.
They are half right. IAS 8 does allow an entity to look to US GAAP when IFRS is silent. But it allows it only at the bottom of a hierarchy, only where IFRS is truly silent, and only where the borrowed rule does not conflict with anything above it. And in two of Kinvara's three cases, the IFRS Interpretations Committee has already said that IFRS is not silent at all.
The hierarchy in IAS 8
Step | Where to look | Reference |
1 | A standard that specifically applies to the transaction, including its application guidance. If there is one, apply it. The rest of the hierarchy is never reached. | IAS 8.7 |
2 | No standard applies, so management develops a policy that gives information that is relevant and reliable: faithful, reflecting substance over legal form, neutral, prudent and complete. | IAS 8.10 |
3 | In doing so it must refer to, in this order: requirements in IFRSs dealing with similar and related issues, then the definitions, recognition criteria and measurement concepts in the Conceptual Framework. | IAS 8.11 |
4 | It may also consider the most recent pronouncements of other standard-setters with a similar conceptual framework (in practice, usually the FASB), other accounting literature and accepted industry practice, but only to the extent they do not conflict with step 3. | IAS 8.12 |
Three things in that hierarchy are easy to miss.
Step 1 is a scope question. Before looking for a gap, read the scope and definitions of the standards that might apply. Many apparent gaps disappear once you ask what the item is: an asset, a liability, a contract with a customer, a financial instrument.
Step 3 is mandatory and comes first. IAS 8.11 says management "shall refer to, and consider the applicability of" IFRS requirements on similar issues and the Conceptual Framework. Reasoning by analogy within IFRS is the main route, not a formality.
Step 4 is permissive and subordinate. IAS 8.12 says management "may also consider" other GAAP, literature and practice. A US GAAP rule cannot be adopted if it conflicts with an analogous IFRS requirement or with the Framework's definitions. For example, capitalising a cost that does not meet the Framework's definition of an asset is not available, however long-standing the US practice.
If a company does build a policy from US GAAP and the FASB later amends that pronouncement, the company is not obliged to follow. If it chooses to, that is a voluntary change in accounting policy (IAS 8.21).
How agenda decisions shut the door
When the IFRS Interpretations Committee decides not to add an issue to its agenda, it usually publishes an agenda decision explaining why. Very often the reason is that the existing standards already provide an adequate basis to answer the question. The decision then sets out how they apply.
That matters for the hierarchy. IAS 8.10–12 applies only "in the absence of an IFRS that specifically applies". An agenda decision that explains which standard applies, and how, establishes that there is no gap. The route to US GAAP, which runs through the gap, is closed.
Agenda decisions are not standards and cannot add or change requirements. But under the IFRS Foundation's Due Process Handbook, their explanatory material derives its authority from the standards themselves. A company is required to apply the standards as reflected in that material, and is entitled to sufficient time to work out and make any change to its accounting policies, done on a timely basis. European enforcers expect agenda decisions to be applied, and auditors will ask about any relevant to you.
Some agenda decisions do the opposite: they conclude that no standard specifically applies and that companies should develop a policy under IAS 8.10–11. Those keep the door open, but they usually also say which IFRS analogies and Framework concepts you must consider first.
Kinvara's three issues
Issue | What the US group does | Under IFRS | Can Kinvara borrow? |
€900,000 spent configuring a cloud ERP system it accesses as a service | Capitalises the implementation costs and amortises them over the hosting term (ASC 350-40, as amended by ASU 2018-15) | A right to access software in the cloud is usually a service contract, not an intangible asset. Configuration and customisation costs are expensed when the services are received, unless they create a separate asset the company controls (agenda decisions, March 2019 and April 2021) | No: IAS 38 and the agenda decisions answer it |
€2,000,000 of bitcoin held as a treasury asset | Measures crypto assets at fair value through net income (ASU 2023-08) | Holdings of cryptocurrency are intangible assets under IAS 38, or inventory under IAS 2 if held for sale in the ordinary course of business. Under IAS 38, cost or, if there is an active market, revaluation with gains in other comprehensive income (agenda decision, June 2019) | No: IAS 38 or IAS 2 applies |
Buying a sister company from the US parent | Carries the sister's assets and liabilities over at the parent's basis and recasts prior periods (ASC 805-50) | IFRS 3 excludes combinations under common control, and the IASB decided in November 2023 not to develop requirements. Either the acquisition method or a book-value method can be developed under IAS 8.10–12 | Yes: a real gap. ASC 805-50 can inform a book-value policy |
Cloud software. This is the classic case. For years many IFRS reporters capitalised software-as-a-service implementation costs, often citing US GAAP. The March 2019 agenda decision concluded that a right to receive access to the supplier's software in the future is a service contract, unless the contract gives the customer control of a software asset. The April 2021 decision dealt with configuration and customisation costs: they are expensed as the supplier, or a third party, performs the services, and only create an asset if they produce something the customer controls, such as separate code. Because IAS 38 and IFRS 15 by analogy provide the answer, there is no gap to fill with ASC 350-40. Kinvara expenses the €900,000, except for any amount paid in advance to the cloud supplier for services not yet received, which is a prepayment.
Bitcoin. The US group measures its crypto at fair value through net income under ASU 2023-08. For IFRS, the June 2019 agenda decision concluded that cryptocurrency held on own account is an intangible asset under IAS 38, unless it is held for sale in the ordinary course of business, when IAS 2 applies. There is no gap, so the US fair value model cannot be borrowed. Kinvara can use the IAS 38 revaluation model if there is an active market, with revaluation gains in other comprehensive income and decreases in profit or loss once any revaluation surplus is used up.
The sister company. Here the door is open. IFRS 3 excludes business combinations under common control from its scope, and the IASB discontinued its project in November 2023 without developing requirements. Kinvara develops a policy under IAS 8.10–12: by analogy to IFRS 3, the acquisition method; or a book-value method, where ASC 805-50 and other literature can help with the detail, such as whose carrying amounts to use and whether to recast prior periods. Our post on merger accounting under IFRS works through the book-value method and the restatement question.
Building a policy when the door is open
Confirm the gap. Read the scope paragraphs of every standard that might apply, and search the IFRIC Update and the IFRS Foundation's compilation of agenda decisions. Document what you found.
Start with IFRS analogies. Identify the standards dealing with similar and related issues, and the Framework definitions the policy must respect.
Only then look outward. If you use US GAAP or other literature, check each element against step 3. Adopt a coherent policy rather than picking pieces from different sources.
Apply it consistently to similar transactions (IAS 8.13), and keep it under review as agenda decisions and new standards appear.
Disclose it. A policy developed under IAS 8.10–12 is very likely to be material accounting policy information, and choosing it may be one of the significant judgements in the financial statements.
The Tipping Point, our free IFRS judgement navigator, takes you through a judgement like this one step by step and drafts the documentation and note wording.
When an agenda decision arrives after you have borrowed
Suppose Kinvara had capitalised SaaS costs before 2021 on the strength of US GAAP. When the agenda decision was published, it had to change. In practice most companies treated the change as a change in accounting policy: applied retrospectively, with comparatives restated and the IAS 8 disclosures. Where the earlier accounting could not have been supported even before the agenda decision, the change is the correction of an error instead, with the error disclosures in IAS 8.49.
The difference is rarely about the numbers and often about the message. Our post on errors versus changes in estimate explains how IAS 8 draws those lines, and the Prior-Period Errors template handles the restatement either way.
A subsidiary of a US group
Kinvara's situation is common in Ireland: a US-owned subsidiary preparing local statutory accounts under IFRS while its group reports in US GAAP. Some differences between the two sets of numbers are unavoidable, and the group reporting pack is not a source of IFRS accounting policies. From 2027, such subsidiaries may also be able to use the reduced disclosures in IFRS 19, even though their parent reports under US GAAP. Our IFRS 19 Eligibility Checker tests that.
The audit angle
Auditors read the policy memo, not just the policy note. For a policy developed under IAS 8.10–12, expect to show how you confirmed there was no applicable standard, which agenda decisions you checked, which IFRS analogies and Framework concepts you considered, and why any US GAAP element does not conflict with them. A policy that simply mirrors the group's US GAAP manual, with no evidence of that analysis, is a finding waiting to happen.
The Disclosure Review tool checks the policy and judgement disclosures.
In short
If an IFRS specifically applies, apply it. The hierarchy in IAS 8.10–12 is only for real gaps.
In a gap, look first at IFRSs dealing with similar issues and at the Conceptual Framework (IAS 8.11). They are mandatory and come first.
US GAAP and other literature may be used (IAS 8.12), but only where they do not conflict with those sources.
An agenda decision explaining how existing standards apply means there is no gap, so US GAAP cannot be borrowed. Apply it in sufficient time, usually as a change in accounting policy.
Document the analysis, disclose the policy and keep checking new agenda decisions.
Templates and tools
For the common-control case, where the door is open, our Merger Accounting template applies the book-value method in Excel: it combines the companies at book value, builds the merger reserve, aligns accounting policies, eliminates intragroup items and produces combined statements with restated comparatives. If you choose the acquisition method instead, the IFRS 3 Acquisition Accounting template handles the purchase price allocation.
The IAS 8 Basis of Preparation and Conceptual Framework notes in the Learning Hub cover the hierarchy and the definitions it relies on.
Kinvara Software Ltd is fictional. References are to IAS 8, as renamed Basis of Preparation of Financial Statements by IFRS 18 from 2027 (the hierarchy in paragraphs 10–12 is unchanged), the Conceptual Framework, IFRS 3, IAS 38, IAS 2, the IFRS Interpretations Committee agenda decisions on cloud computing arrangements (March 2019 and April 2021) and holdings of cryptocurrencies (June 2019), and the IFRS Foundation Due Process Handbook.
