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International Financial Reporting Standards (IFRS)

IFRS 1 First-time Adoption of International Financial Reporting

Standard

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IntroductionThe objectives related to the development of international

accounting standards IAS(International Accounting Standards) / IFRS (International Financial Reporting Standards):

Improve transparency and comparability of financial statements;

Allow comparison of companies from different countries;

Facilitate market listing of companies on the exchanges worldwide;

Obtain and restore investor confidence;

Provide a primary basis of accounting to countries devoid of it.

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The choice of standards IAS / IFRS is the result of two major decisions:

The recommendation of the IOSCO (International Organization of Securities Commissions);

The choice of the European Union.

The IOSCO recommended in May 2000 to all markets authorities in the world to accept the use of standards IAS / IFRS for emissions and quotations made by transnational issuers in their market.

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Then, the European Commission has pronounced in June 2000 for the promotion of the use of the accounting framework of the IASB within the European Union.

For this, the European Commission:

Introduced a regulation mandating the IAS / IFRS standards in 2005;

Has started a process of modernization of European directives;

Set up a Community mechanism of adoption and a framework to ensure strict implementation of standards.

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The IASB developed the IFRS 1 approved in 2003 and entered into force starting at 01.01.2004.

An enterprise which applying IAS/IFRS for the first time must comply with each IAS/IFRS and current interpretation at the time of this first time application.

IFRS 1 replaces SIC-8: First-time Application of IASs as the Primary Basis of Accounting.

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IFRS 1- Purpose

The purpose of the standard is to ensure that the first IFRS financial statements of an entity and its interim financial reports contain high quality information, which:

are transparent for users and comparable over all periods presented;

provide a suitable starting point for accounting under IFRS;

can be implemented at a cost that does not exceed the benefits of users

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IFRS 1- Purpose

Eventually, IFRS 1 is expected to compare:

the data contained in the financial statements prepared under IFRS by a company applying for the first time,

with the financial statements of different companies applying for the first time at a given date.

Because the current figures and those provided by way of a comparison will be based on the same set of standards at the time of the first application of IAS/IFRS.

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IFRS 1- Scope

An entity applies IFRS 1 in:

its first IFRS financial statements;

each interim financial report to be submitted if necessary in accordance with IAS 34 Interim Financial Reporting relating to a part of the period covered by its first IFRS financial statements.

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Recognition and Measurement

In general, IFRS 1 requires:

that entity applies each IFRS effective at the date of transition (closing or end of period) to its first IFRS financial statements;

the obligatory establishment of an opening IFRS balance sheet (starting point for accounting according to IFRS) with comparative information of prior year restated.

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Case Study FactsAn entity A presented its financial statements under its previous GAAP

annually as at December 31 each year. A decided to adopt IFRS as of December 31, 2005, and to present one-year comparative information for the year 2004.

RequiredWhen should A prepare its opening IFRS balance sheet?

SolutionThe beginning of the earliest period for which A should present full

comparativeinformation would be January 1, 2004. The opening IFRS balance sheet that the entity would need to prepare under IFRS 1 would be as of January 1, 2004.

If A decided to present two-year comparative information, then the beginning of the earliest period for which the entity should present full comparative information would be January 1, 2003 and the date of opening IFRS balance sheet would be as of January 1, 2003.

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Recognition and Measurement

In its first opening IFRS balance sheet, an entity must:

recognizes all assets and liabilities which are required by IFRS;

does not enter items as assets or liabilities if IFRS do not permit such recognition;

reclassifies items that it recognized depending on previous accounting standards;

applies IFRS to measure all recognized assets and liabilities.

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Case Study FactsAn entity B presented its financial statements under the national

GAAP until 2004. It adopted IFRS from 2005 and it must prepare an opening IFRS balance sheet as at January 1, 2004. In preparing the IFRS opening balance sheet B noted: • Under its previous GAAP, it had deferred advertising costs of

$1,000,000 and had classified proposed dividends of $500,000 as a current liability.

• It had not made a provision for warranty of $200,000 in the financial statements presented under previous GAAP since the concept of “constructive obligation” was not recognized under its previous GAAP.

RequiredThe entity B on the treatment of all the above items under IFRS 1.

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Case Study SolutionIn order to prepare the opening IFRS balance sheet at January 1, 2004, B

would need to make these adjustments to its balance sheet at December 31, 2003, presented under its previous GAAP:

• (a) IAS 38 does not allow advertising costs to be deferred whereas B’s previous GAAP allowed this treatment. Thus, $1,000,000 of such deferred costs should be derecognized (expensed) under IFRS.

• (b) IAS 37 requires recognition of a provision for warranty but B’s previous GAAP did not allow a similar treatment. Thus, a provision for warranty of $200,000 should be recognized under IFRS.

• (c) IAS 10 does not allow proposed dividends to be recognized as a liability; instead, under the latest revision to IAS 10, they should be disclosed in footnotes. B’s previous GAAP allowed proposed dividends to be treated as a current liability. Therefore, proposed dividends of $500,000 should be disclosed in footnotes.

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ExemptionsThe standard establishes two categories of

exceptions to the principle wherein the first opening IFRS balance sheet of an entity must be conform to each IFRS;

Exemptions to some of other IFRS;

The prohibition of retrospective application of some measures of other IFRS.

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Exemptions to some of other IFRS

Business Combinations (IFRS 3);

Fair value or revaluation as deemed cost ( IAS 16, 40 and 38);

Benefits of personnel (IAS 19);

Cumulative translation differences (IAS 21);

Compound financial instruments (IAS 32);

Assets and liabilities of subsidiaries, associates and joint ventures (IAS 39).

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The prohibition of retrospective application of some measures of

other IFRS

Derecognition of financial assets and liabilities;

Hedge accounting;

Estimates.

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Presentation and Disclosure

The standard provides no exemption to the measures for the presentation and disclosure requirements in other IFRSs:

Comparative information;

Explanation and reconciliation of IFRS transition;

Use of fair value as deemed cost;

Interim financial reports.

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Presentation and Disclosure

Comparative information:A first-time adopter should present at least one year’s

worth of comparative information.

Explanation and reconciliation of IFRS transition:The entity shall explain the impact of the transition

from previous GAAP to IFRS on its financial position, its financial performance and published cash flows.

In order to comply with the requirement, reconciliation of equity and profit and loss as reported under previous GAAP to IFRS should be included in the entity’s first IFRS financial statements.

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Presentation and Disclosure

Use of fair value as deemed cost:If in its first opening balance sheet under IFRS, an entity uses fair value

as deemed cost of a tangible asset, an investment property or an intangible asset, the first IFRS financial statements of the entity must state for each line item in the opening IFRS balance sheet: the aggregate of those fair values and the aggregate adjustment to the carrying amounts reported under previous GAAP.

Interim financial reports:If an entity presents an interim financial report under IAS 34- Interim

Financial Reporting for a part of the period covered by its first IFRS financial statements, in addition to disclosures made under IAS 34, the first-time adopter should also present a reconciliation of the equity and profit and loss under previous GAAP for the comparable interim period to its equity and profit and loss under IFRS.