First-Time Adoptionof International Financial

Reporting Standards: IFRS 1

Wiecek and Young

IFRS PrimerChapter 37

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First-Time Adoption of International Financial Reporting Standards

Related standards IFRS 1 Current GAAP comparisons Looking ahead End-of-chapter practice

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IFRS 1 – Overview

Objective and scope Recognition and measurement Presentation and disclosure

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IFRS 1 – Objective and Scope This standard is meant to provide relief from the onerous task of conversion

and provides guidance on how to transition over to IFRSs

Application– An entity would apply this the first time it issues statements with an explicit and

unreserved statement that it is in compliance with IFRSs

In general, the standard requires retrospective application – This will allow users to have greater comparability

Two Warnings:1. Cost benefit-Difficult and time consuming to go back and collect the information needed to apply IFRSs

-Information may never have been captured by the entity’s accounting information systems

2. No hindsight-Bias might be introduced when applying the standards retrospectively

-Only information that was available at the time may be used for estimates

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IFRS 1 – Objective and Scope The overall objective of the IFRS:

• Transparency

• Suitable starting point

• Costs do not exceed the benefits

First IFRS Statements Two components:

1. Full adoption of IFRS

2. Explicit and unreserved statement of compliance with IFRSs

An entity’s financial statements are the first IFRS statements if• Most recent financial statements were presented– under national GAAP,– in conformity with IFRSs but with no explicit statement to that effect,– under national GAAP with partial application of IFRSs, or– under national GAAP with a reconciliation of some amounts to IFRSs;

• Entity has prepared IFRS statements for internal use only;

• Entity has prepared an IFRS reporting package for consolidation purposes only; or

• Entity did not prepare financial statement at all previously

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IFRS 1 – Recognition and Measurement Opening IFRS Statement of Financial Position Date of transition

– Beginning of the first period for which comparative statements are presented

Accounting Policies First reporting period

– Period in which the entity first presents its IFRS statements

The opening statement of financial position will• Recognize all and only assets/liabilities required/allowed under IFRSs

• Present all assets/liabilities in accordance with IFRSs

• Measure all assets/liabilities in accordance with IFRSs

Any adjustments should be recognized through retained earnings at the date of transition

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IFRS 1 – Recognition and MeasurementExemptions from other IFRSs

1. Business combinations

2. Fair value or revaluation as deemed cost

3. Employee benefits

4. Cumulative translation differences

5. Compound financial instruments

6. Assets and liabilities of subsidiaries, associates, and joint ventures

7. Designation of previously recognized financial instruments

8. Share-based payment transactions

9. Insurance contracts

10. Decommissioning liabilities included in the cost of property, plant, and equipment

11. Leases

12. Fair value measurement of financial assets or financial liabilities at initial recognition

13. Financial asset or an intangible asset accounted for in accordance with IFRIC 12

14. Borrowing costs

Exemptions are meant to provide some relief from the fairly onerous task of transitioning to IFRSs

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IFRS 1 – Recognition and MeasurementIllustration 37-1 summarizes the exemptions under IFRS 1

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IFRS 1 – Recognition and Measurement

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IFRS 1 – Recognition and Measurement

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IFRS 1 – Recognition and MeasurementExemptions from the retrospective application

1. Derecognition of financial assets and financial liabilities

2. Hedge accounting

3. Estimates

4. Assets classified as held for sale and discontinued operations

5. Some aspects of accounting for non-controlling interests

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IFRS 1 – Recognition and Measurement1. Derecognition of financial assets and financial liabilities

– Applied prospectively for transactions occurring on or after January 1, 2004

– Financial instruments already derecognized prior to that would not be rerecognized

– Entity is allowed to apply the derecognition provisions retrospectively only if sufficient information is and was available at the time of initial transaction

2. Hedge accounting– Hedging relationships (under a previous GAAP) that do not qualify as such under

IFRS should not be recognized on transition

– Entity may not retrospectively designate hedges

3. Estimates– Entity may not use hindsight for estimates

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IFRS 1 – Recognition and Measurement4. Assets classified as held for sale and discontinued operations

– IFRS 5 is to be applied retrospectively

– Not available to entities with transition dates after January 1, 2005

5. Some aspects of accounting for non-controlling interests– Entity applies certain requirements from IAS 27 prospectively from the date of

transition

– If it elects to apply IFRS 3 and IAS 21 retrospectively, it must also apply IAS 27 retrospectively

IFRS 1 – Presentation and Disclosure

Comparative information Non-IFRS Comparative Information and Historical Summaries

– Entities often present summary information of selected data

– Not required under IFRSs

– Where the entity provides additional comparatives under previous GAAP, the entity must clearly label this as non-IFRS and provide additional disclosures

Explanation of transition to IFRSs General rule

– Entity should explain how the transition affects its financial statements

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IFRS 1 – Presentation and Disclosure

Reconciliations• Equity under previous GAAP to equity under IFRSs

• Total comprehensive income under previous GAAP to comprehensive

income under IFRSs

• Must include additional information about impairment booked on transition

Designation of financial assets or financial liabilities– Designating a financial instrument as FVTPL

Additional information is required regarding fair values of those specific instruments

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IFRS 1 – Presentation and Disclosure

Use of fair value as deemed cost– Entity must disclose additional information, including the amount of the

adjustment

Interim financial reports– Entity must present interim information for the period covered by its first

IFRS statements

– IFRS 1 provides detail about the additional requirements relating to interim information

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Current GAAP Comparisons

Page 6 of 164 ofhttp://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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Looking AheadDerecognition of financial assets and liabilities AcSB

– Revision of transactions that occurred prior to ‘the date of transition to IFRSs’ – Address the transitional issues of countries whose transition date to IFRSs is

significantly later than January 1 2004

IASB – Noted that January 2004 is the date the derecognition requirements of IAS 39 became

effective and is therefore not related to transition dates– Agreed and decided not to change paragraph 27 of IFRS 1

Reassessment of accounting under previous GAAP AcSB

– Proposed precluding reassessment of previous GAAP accounting when it adopted the respective IFRS word for word and provided the same transitional provision

IASB – Decided to proceed with the proposal– AcSB was asked to redraft the proposal to clearly identify the scope

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Looking AheadRetrospective restatement of fair values AcSB

– Recommended a principle prohibiting the retrospective restatement of fair values Unless the information determined or available as at the date IFRSs required the fair

value to be determined IASB

– Agreed and asked the AcSB staff to draft an amendment for future

Oil and gas industry issue: Full cost accounting Proposal

– Allow these entities allocating the existing carrying amount of each cost centre to the oil and gas assets within that cost center

‘CGU approach’

IASB– Decided to proceed with this proposal and asked AcSB to prepare a comprehensive

description of the issue

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End-of-Chapter Practice

37-1 IFRS 1 is a very important standard for entities transitioning to IFRSs.

InstructionsExplain the basic philosophy of the standard and discuss why the exemptions are necessary.

37-2 Yodel Limited has various classes of fixed assets.

InstructionsWhat exemptions relate to fixed assets? Identify the exemptions and note how the entity would account for the fixed assets upon transition to IFRSs without the exemption and with the exemption.

37-3 IFRS 1 generally requires retrospective application of all IFRSs that exist at the year end balance sheet date in the first IFRS financial statements.

InstructionsDiscuss any situations where the entity is not allowed to use retrospective application or may opt to apply IFRSs prospectively. Why are these deviations allowed? Discuss.

37-4 Hene Limited is a U.S. public company following U.S. GAAP. As a subsidiary of Hene Inc., Hene Limited prepares annual financial statements that are in accordance with IFRSs. The statements are used only for consolidation purposes. It is now 2011 and Hene Limited must prepare IFRS financial statements as a U.S. public company.

InstructionsDiscuss whether 2011 is the first IFRS reporting period for Hene Limited.

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