IFRS 1 First-time Adoption of International Financial Reporting Standards

 

IFRS 1 First-time Adoption of International Financial Reporting Standards

 

Background

IFRS 1 ‘’First-time Adoption of International Financial Reporting Standards states the process that an entity should follow when adopting IFRS for the first time based on the general financial statements. IFRS provides limited exemptions from the general requirement of compliance with each IFRS applicable at the end of its initial IFRS reporting period.

The revised version of IFRS 1 was released in November 2008 and applies if an entity's first IFRS financial statements on or after 1 July 2009.

IFRS 1 supersedes SIC-8 First-time Application of IASs.

Objective

IFRS 1 First-time Adoption of International Financial Reporting Standards defines the procedures that an entity follow when adopting IFRS for the first time for preparing common financial statements.

 

Definition of first-time adoption

The entity who adopts IFRS first time, makes an explicit and unreserved statement that its general purpose financial statements comply with IFRSs.

An entity may be a first-time adopter if, in the previous year, it prepared the IFRS financial statements for internal use, provided that those IFRS financial statements were not available to owners or external parties such as investors or debtors. If a set of IFRS financial statements is, for whatever reason, available to owners or third parties over the past year, the entity would already be considered to be in the IFRSs, and IFRS 1 does not apply.

An entity can also be a first-time adopter if, in the previous year, its financial statements:

• ·       asserted compliance with some but not all IFRSs, or
• ·       included only a reconciliation of selected numbers from previous GAAP to IFRSs. (Previous GAAP means the GAAP that an entity complied with immediately before adopting IFRSs.)

However, an entity shall not be a first-time adopter if, last year, its financial statements asserted:

• ·       Compliance with IFRSs even if the auditor's report contains a qualification in relation to IFRSs.
• ·       Compliance with both GAAP and IFRSs.

 

An entity that has applied IFRSs in the past reporting period, but whose most recent annual financial statements do not have a clear and unqualified statement of compliance with IFRSs may choose to:

• apply the requirements of IFRS 1 (including various exemptions permitted in the application used), or

• Implement IFRS immediately in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, as if they have never stopped using IFRSs.

 

Overview for an entity that adopts IFRSs for the first time in its annual financial statements for the year ended 31 December 2014

Accounting policies

Select accounting policies based on IFRSs effective at 31 December 2014.

 

IFRS reporting periods

Prepare at least 2014 and 2013 financial statements and the opening statement of financial position (as of 1 January 2013 or beginning of the first period for which full comparative financial statements are presented, if earlier) by applying the IFRSs effective at 31 December 2014.

 

Since IAS 1 requires at least one year of comparative advance financial information to be submitted, the initial statement of financial position is not earlier than 1 January 2013. This means that at least one company's first financial statements should include:

• ü  three statements of financial position
• ü  two statements of profit or loss and other comprehensive income
• ü  two separate statements of profit or loss (if presented)
• ü  two statements of cash flows
• ü  two statements of changes in equity, and related notes, including comparative information

If a 31 December 2014 adopter reports selected financial data (but not full financial statements) on an IFRS basis for periods prior to 2013, in addition to full financial statements for 2014 and 2013, that does not change the fact that its opening IFRS statement of financial position is as of 1 January 2013.

 

Essential adjustments to move from previous GAAP to IFRSs at the time of first-time adoption

Derecognition of previous GAAP assets and liabilities

The entity need to eliminate previous-GAAP assets and liabilities from the opening statement of financial position if it doesn’t qualify for recognition under IFRSs.

For example:

• Ø  IAS 38 does not allow recognition of expenditure on any of the following as an intangible asset:
• Ø  research
• Ø  start-up, pre-operating, and pre-opening costs
• Ø  training
• Ø  advertising and promotion
• Ø  moving and relocation

 

If the entity's previous GAAP had considered these as assets, they should be eliminated in the opening IFRS statement of financial position.

If the entity's previous GAAP had recognized accrual of liabilities for "general reserves", restructurings, future operating losses, or major renovations that do not meet the conditions for recognition as a provision under IAS 37- should be eliminated in the opening IFRS statement of financial position.

If the entity's previous GAAP had measured recognition of contingent assets as defined in IAS 37- It should be eliminated in the opening IFRS financial statement.

 

Recognition of some assets and liabilities not considered under previous GAAP

On the other hand, the entity should recognize all assets and liabilities that are required to be recognised by IFRS even if they were never considered under GAAP.

For example:

• IFRS 9 describes the recognition of all derivative financial assets and liabilities, which includes embedded derivatives. These were not recognized under many local GAAP.
• IAS 19 describes an employer to recognize a responsibility when the employee has rendered service in exchange for benefits to be paid in the near future. These are not only post-employment benefits, but also health and life insurance obligations, vacations, termination benefits, and deferred compensation. For 'overfunded' defined benefit plans, this would be a plan asset.
• IAS 37 implies the recognition of provisions as liabilities. Examples could include an entity's obligations for restructuring, onerous contracts, decommissioning, remediation, site restoration, warranties, guarantees and litigation.
• Deferred tax assets and liabilities would be considered in accordance with IAS 12.

 

Reclassification

The entity should reclassify previous-GAAP opening statement of financial position items into the suitable IFRS classification. Samples:

o IAS 10 does not allow dividends declared or proposed after the date of the statement of financial position to be classified as a liability on the date of the statement of financial position. If such liability were recognized under previous GAAP, it would be reversed in the opening IFRS statement of financial position.

o If the entity's prior GAAP had allowed the treasury shares (the treasury shares of an entity it had purchased) to be reported as an asset, they would be reclassified as a component of equity under IFRS.

o Items classified as identifiable intangible assets in a business combination accounted for under previous GAAP may require them to be reclassified as goodwill under IFRS 3 because they do not meet the definition of an intangible asset under IAS 38. The opposite may also be true in some cases.

o IAS 32 has principles for classifying items as financial liabilities or equity. Therefore, mandatorily exchangeable preferred shares that may have been classified as equity under previous GAAP would be reclassified as liabilities in the opening IFRS statement of financial position.

Note that IFRS 1 makes an exception to the "split accounting" provisions of IAS 32. If the liability component of a compound financial instrument is no longer outstanding as of the date of the opening IFRS statement of financial position, the entity is not obliged to reclassify the original equity component of the compound instrument from accumulated earnings and other equity.

o The reclassification principle would be applied with the purpose of defining reportable segments according to IFRS 8.

o Some offsets (offsetting) of assets and liabilities or items of income and expenses that had been acceptable under previous GAAP may no longer be acceptable under IFRS.

 

Measurement

The general measurement principle (there are numerous notable exceptions below) is to apply effective IFRSs to measure all recognized assets and liabilities.

 

How to recognise adjustments required to move from previous GAAP to IFRSs

Adjustments necessary to move from previous GAAP to IFRS on the date of transition should be recognized directly in retained earnings or, if applicable, in another category of equity on the date of transition to IFRS.

 

Estimates

In preparing IFRS estimates retrospectively at the date of transition to IFRSs, an entity should use the inputs and assumptions that had been used to determine GAAP estimates prior to that date (after adjustments to reflect differences in accounting policies). The entity is not allowed to use information that was available only after the previous GAAP estimates were made, except to correct an error.

 

Changes to disclosures

For many entities, new disclosure areas that were not required under previous GAAP will be added (perhaps segment information, earnings per share, discontinued operations, contingencies and fair values of all financial instruments) and disclosures that had been required under GAAP. previous. be expanded (perhaps related party disclosures).

 

Disclosure of selected financial data for periods before the first IFRS statement of financial position

If a first-time adopter wants to disclose selected financial information for periods prior to the date of the opening IFRS statement of financial position, they are not required to report that information to IFRS. Conform that the financial information previously selected to IFRS is optional.

 

If the entity elects to present the previously selected financial information based on its previous GAAP rather than IFRS, it must prominently label that previous information as non-compliant with IFRS and, in addition, must disclose the nature of the main adjustments that would be made that information comply with IFRS. This last disclosure is narrative and not necessarily quantified.

 

Disclosures in the financial statements of a first-time adopter

IFRS 1 requires disclosures that explain how the transition from previous GAAP to IFRS affected the entity's financial position, financial performance, and cash flows. This includes:

• reconciliations of equity reported under previous GAAP with equity under IFRS both (a) on the date of transition to IFRS and (b) at the end of the last annual period reported under previous GAAP. [IFRS 1.24 (a)] (For an entity that adopts IFRS for the first time in its financial statements of December 31, 2014, the reconciliations would be as of January 1, 2013 and December 31, 2013).

• reconciliations of total comprehensive income for the last annual period reported under previous GAAP with total comprehensive income under IFRS for the same period

• explanation of the material adjustments that were made, when adopting IFRS for the first time, to the statement of financial position, statement of comprehensive income and statement of cash flows (the latter if presented under previous GAAP)

• if errors were discovered in previous GAAP financial statements in the course of the transition to IFRS, they should be disclosed separately

• if the entity recognized or reversed any impairment loss in preparation of its opening IFRS statement of financial position, these should be disclosed

• appropriate explanations if the entity has chosen to apply any of the specific recognition and measurement exemptions allowed under IFRS 1, for example, if it used fair values ​​as deemed cost

 

Disclosures in interim financial reports

If an entity is to adopt IFRS for the first time in its annual financial statements for the year ended December 31, 2014, some disclosure is required in its interim financial statements prior to the financial statements of December 31, 2014, but only whether those interim financial statements are intended to comply with IAS 34 Interim Financial Reporting. Explanatory information and a reconciliation are required in the interim report that immediately precedes the first set of IFRS annual financial statements. The information includes reconciliations between IFRS and previous GAAP.

 

Exceptions to the retrospective application of other IFRSs

Prior to January 1, 2010, there were three exceptions to the general principle of retrospective application. On July 23, 2009, IFRS 1, effective as of January 1, 2010, was amended to add two additional exceptions to further simplify the transition to IFRS for first-time adopters. The five exceptions are: [IFRS 1.Appendix B]

 

IAS 39 – Derecognition of financial instruments

A first-time adopter will apply the derecognition requirements in IAS 39 prospectively for transactions that occur after January 1, 2004. However, the entity may apply the derecognition requirements in retrospect provided the necessary information has been obtained at the time of initially accounting for these transactions.

 

IAS 39 – Hedge accounting

The general rule is that an entity shall not reflect in its opening IFRS statement of financial position a hedging relationship of a type that does not qualify for hedge accounting in accordance with IAS 39 or IFRS 9. However, if an entity designates a net position like a covered item. Under previous GAAP, you may designate an individual item within that net position as a hedged item in accordance with IFRSs, provided that you do so no later than the date of transition to IFRSs.

Note: The amended requirements apply when an entity applies IFRS 9 Financial Instruments (2013).

 

IAS 27 – Non-controlling interest

IFRS 1.B7 lists the specific requirements of IFRS 10 Consolidated Financial Statements that will be applied prospectively..

 

Full-cost oil and gas assets

Entities using the full cost method may elect exemption from retrospective application of IFRSs for oil and gas assets. Entities electing this exemption will use the carrying amount under its old GAAP as the deemed cost of its oil and gas assets at the date of first-time adoption of IFRSs.

 

Determining whether an arrangement contains a lease

If a first-time adopter with a lease made the same type of determination of whether an agreement contained a lease under previous GAAP as required by IFRIC 4 Determine if an agreement contains a lease, but on a different date to that required under IFRIC 4, the amendments exempt the entity from having to apply IFRIC 4 when adopting IFRS.

 

Optional exemptions from the basic measurement principle in IFRS 1

There are some other optional exemptions to the general principles of restatement and measurement set out above. The following exceptions are individually optional. They relate to: business combinations [IFRS 1. Appendix C] and various others [IFRS 1.Appendix D]:

• Ø  share-based payment transactions
• Ø  insurance contracts
• Ø  fair value, previous book value or revaluation as deemed cost
• Ø  leases
• Ø  cumulative translation differences
• Ø  investments in subsidiaries, jointly controlled entities, associates and joint ventures
• Ø  assets and liabilities of subsidiaries, associated companies and joint ventures
• Ø  compound financial instruments
• Ø  designation of previously recognized financial instruments
• Ø  measurement of the fair value of financial assets or financial liabilities at initial recognition
• Ø  decommissioning liabilities included in the cost of property, plant and equipment
• Ø  financial assets or intangible assets accounted for in accordance with IFRIC 12 Service concession agreements
• Ø  borrowing costs
• Ø  transfers of customer assets
• Ø  extinguish financial liabilities with equity instruments
• Ø  severe hyperinflation
• Ø  joint arrangements
• Ø  remove costs in the production phase of a surface mine

Some, but not all, are described below.

 

Business combinations that occurred before opening statement of financial position date

IFRS 1 includes Appendix C which explains how a first-time adopter should take into account business combinations that occurred prior to the transition to IFRS.

An entity may maintain the original prior GAAP accounting, that is, not restate:

• ·       previous mergers or canceled goodwill of reserves
• ·       the carrying amounts of the assets and liabilities recognized on the acquisition or merger date, or
• ·       how goodwill was initially determined (do not adjust purchase price allocation on acquisition)

However, if desired, an entity may choose to reformulate all business combinations from a date it selects before the opening date of the statement of financial position.

In all cases, the entity must perform an initial impairment test of IAS 36 of any goodwill remaining in the opening IFRS statement of financial position, after reclassifying, as appropriate, GAAP intangibles prior to goodwill.

The business combination exemption also applies to acquisitions of investments in associates, interests in joint ventures and interests in a joint operation when the operation constitutes a business.

 

Deemed cost

Assets accounted for at cost (for example, property, plant and equipment) can be measured at their fair value on the date of transition to IFRS. Fair value is converted into 'deemed cost' in the future under the IFRS cost model. Estimated cost is an amount used as a substitute for cost or depreciated cost on a given date.

If, prior to the date of its first IFRS statement of financial position, the entity had revalued any of these assets under its previous GAAP, either at fair value or at cost adjusted to the price index, that previous GAAP amount revalued to the date The revaluation can be converted into the attributed cost of the asset according to IFRS.

If, prior to the date of its first IFRS statement of financial position, the entity had performed a one-time revaluation of assets or liabilities at fair value due to a privatization or initial public offering, and the revalued amount became cost under previous GAAP That amount would continue to be considered cost after the initial adoption of IFRS.

This option applies to intangible assets only if there is an active market.

If the carrying amount of property, plant and equipment or intangible assets that are used in regulated rate activities includes amounts under previous GAAP that do not qualify for capitalization under IFRS, a first-time adopter may choose to use Previous GAAP book values ​​amount such items as the cost attributed in the initial adoption of IFRS.

 

Eligible entities subject to rate regulation may also optionally apply IFRS 14 Regulatory Deferral Accounts in the transition to IFRS, and in subsequent financial statements.

 

IAS 19 – Employee benefits: actuarial gains and losses

An entity may choose to recognize all cumulative actuarial gains and losses for all benefit plans defined on the opening date of the IFRS statement of financial position (i.e., reset to zero any broker recognized under previous GAAP), even if it chooses use IAS 19 broker approach for actuarial gains and losses arising after first-time adoption of IFRS. If a first-time adopter uses this exemption, they will apply it to all plans.

Note: This exemption is not available when applying IAS 19 Employee Benefits (2011). IAS 19 (2011) is effective for annual reporting periods beginning on or after January 1, 2013.

 

IAS 21 - Accumulated Translation Reservations

An entity may choose to recognize all translation adjustments arising from the translation of the financial statements of foreign entities into accumulated gains or losses on the opening date of the IFRS statement of financial position (i.e. reset the conversion reserve to zero. included in equity under previous GAAP)) If the entity elects this exemption, the gain or loss on the subsequent disposition of the foreign entity will be adjusted only for those accumulated conversion adjustments that arise after the opening date of the statement of situation IFRS financial statement.

 

IAS 27 – Investments in separate financial statements

In May 2008, the IASB amended the standard to change the way the cost of an investment is measured in the separate financial statements in the first-time adoption of IFRS. Modifications to IFRS 1:

Allow first-time adopters to use an 'deemed cost' of fair value or book value in accordance with prior accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements, eliminating the define the cost method of IAS 27 and add a requirement to present dividends as income in the investor's separate financial statements that require that, when a new parent is formed in a reorganization, the new parent must measure the cost of its investment in the previous parent in the carrying amount of its share of the equity items of the previous parent on the date of the reorganization

 

Assets and liabilities of subsidiaries, associates and joint ventures: different adoption dates of IFRS for the investor and the investee

If a subsidiary becomes an adopter for the first time after its parent, IFRS 1 allows you to choose between two measurement bases in the subsidiary's separate financial statements. In this case, a subsidiary must measure its assets and liabilities as:

• ·       the carrying amount to be included in the parent's consolidated financial statements, based on the date of the parent's transition to IFRS, if no adjustments were made to the consolidation procedures and the effects of the business combination on which the parent acquired the subsidiary or
• ·       Amounts the carrying amounts required by IFRS 1 based on the date of the subsidiary's transition to IFRS

A similar choice is available for an associate or joint venture that becomes a first-time adopter later than an entity that has significant influence or joint control over it.

If a parent becomes an adopter for the first time later than its subsidiary, the parent must, in its consolidated financial statements, measure the assets and liabilities of the subsidiary with the same carrying amount as in the separate financial statements of the subsidiary, after adjusting for consolidation adjustments and for the effects of the business combination in which the parent acquired the subsidiary. The same approach is applied in the case of associates and joint ventures.