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Deloitte's 104-page book on First-time Adoption ̵=
1; A
Guide to IFRS 1 deals with first-time
adoption issues related to the stable platform I=
FRSs,
with focus on 2005 adopters. The booklet includes: =
- A summary of IFRS 1.=
- Specific issues rela=
ted to
first-time adoption.
- Questions and respon=
ses.
- A disclosure checkli=
st.
- A large number of
illustrative examples.
It a=
lso
offers further illustrative examples and implementation guidance on
applying IFRS 2. You can Download First=
-time
Adoption – A Guide to IFRS 1 (PDF 2,506k, August 2004, 104
pages).
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Objective
IFRS 1,
First-time Adoption of International Financial Reporting Standards, sets
out the procedures that an entity must follow when it adopts IFRSs for the first time as the basis for prepari=
ng its
general purpose financial statements.
Definition of first-time adopti=
on
A firs=
t-time
adopter is an entity that, for the first time, makes an explicit and
unreserved statement that its general purpose financial statements comp=
ly
with IFRSs.
An ent=
ity
may be a first-time adopter if, in the preceding year, it prepared IFRS
financial statements for internal management use, as long as those IFRS
financial statements were not and given to owners or external parties s=
uch
as investors or creditors. If a set of IFRS financial statements was, f=
or
any reason, given to an external party in the preceding year, then the
entity will already be considered to be on IFRSs,
and IFRS 1 does not apply.
An ent=
ity
can also be a first-time adopter if, in the preceding year, its publish=
ed
financial statements asserted:
- Compliance with some b=
ut not
all IFRSs.
- Included only a
reconciliation of selected figures from previous GAAP to IFRSs. (Previous GAAP means the GAAP that an
entity followed immediately before adopting to IFRSs.)
However, an entity is not a first-time adopter if, in the
preceding year, its published financial statements asserted:
- Compliance with IFRSs even if the auditor's report contained=
a
qualification with respect to conformity with IFRSs.
- Compliance with both
previous GAAP and IFRSs.
Effective date of IFRS 1=
IFRS 1
applies if an entity's first IFRS financial statements are for a period
beginning on or after 1 January 2004. Earlier application is encouraged=
.
Overview for an entity that ado=
pts IFRSs for the first time in its annual financial
statements for the year ended 31 December 2005
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1. Accounting policies. Select its account=
ing
policies based on IFRSs in force at 31 De=
cember
2005. (The exposure draft that preceded IFRS 1 had proposed that an
entity could use the IFRSs that were in f=
orce
during prior periods, as if the entity had always used IFRS. That opt=
ion
is not included in the final standard.)
2. <=
b>IFRS
reporting periods. Prepare at least 2005 and 2004 financial
statements and restate retrospectively the opening balance sheet
(beginning of the first period for which full comparative financial
statements are presented) by applying the IFRSs<=
/span>
in force at 31 December 2005.
a. Since IAS 1 requires that at least one year of
comparative prior period financial information be presented, the open=
ing
balance sheet will be 1 January 2004 if not earlier.
b. I=
f a 31
December 2005 adopter reports selected financial data (but not full
financial statements) on an IFRS basis for periods prior to 2004, in
addition to full financial statements for 2004 and 2005, that does not
change the fact that its opening IFRS balance sheet is as of 1 January
2004.
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Adjustments required to move fr=
om
previous GAAP to IFRSs at the time of first=
-time
adoption
1. Derecognition of some old ass=
ets
and liabilities. The entity should eliminate previous-GAAP asse=
ts
and liabilities from the opening balance sheet if they do not qualify f=
or
recognition under IFRSs. For example: =
a. IAS 38 does not permit recognition of expenditure on an=
y of
the following as an intangible asset:
- research
- start-up, pre-operatin=
g, and
pre-opening costs
- training
- advertising and promot=
ion
- moving and relocation =
If the entity's previous GAAP had rec=
ognised
these as assets, they are eliminated in the opening IFRS balance sheet.=
b. If =
the
entity's previous GAAP had allowed accrual of liabilities for "gen=
eral
reserves", restructurings, future operating losses, or major overh=
auls
that do not meet the conditions for recognition as a provision under IAS
37, these are eliminated in the opening IFRS balance sheet. =
c. If =
the
entity's previous GAAP had allowed recognition of reimbursements and
contingent assets that are not virtually certain, these are eliminated =
in
the opening IFRS balance sheet.
2. =
Recognition
of some new assets and liabilities. Conversely, the entity shou=
ld recognise all assets and liabilities that are req=
uired
to be recognised by IFRS even if they were =
never recognised under previous GAAP. For example:
a. IAS 39 requires recognition of all
derivative financial assets and liabilities, including embedded
derivatives. These were not recognised unde=
r many
local GAAPs.
b. IAS 19 requires an employer to rec=
ognise
its liabilities under defined benefit plans. These are not just pension
liabilities but also obligations for medical and life insurance, vacati=
ons,
termination benefits, and deferred compensation. In the case of
"over-funded" plans, this would be a defined benefit asset. <=
o:p>
c. IAS 37 requires recognition of provisions as liabilitie=
s.
Examples could include an entity's obligations for restructurings, oner=
ous
contracts, decommissioning, remediation, site restoration, warranties,
guarantees, and litigation.
d. Def=
erred
tax assets and liabilities would be recognised in
conformity with IAS 12.
3. =
Reclassification.
The entity should reclassify previous-GAAP opening balance sheet items =
into
the appropriate IFRS classification. Examples:
a. IAS 10 does not permit classifying dividends declared or
proposed after the balance sheet date as a liability at the balance she=
et
date. In the opening IFRS balance sheet these would be reclassified as a
component of retained earnings.
b. If =
the
entity's previous GAAP had allowed treasury stock (an entity's own shar=
es
that it had purchased) to be reported as an asset, it would be reclassi=
fied
as a component of equity under IFRS.
c. Ite=
ms
classified as identifiable intangible assets in a business combination
accounted for under the previous GAAP may be required to be classified =
as
goodwill under IAS 22 because they do not meet the definition of an
intangible asset under IAS 38. The converse may also be true in some ca=
ses.
These items must be reclassified.
d. IAS 32 has principles for classifying items as financial
liabilities or equity. Thus mandatorily
redeemable preferred shares and puttable sh=
ares
that may have been classified as equity under previous GAAP would be
reclassified as liabilities in the opening IFRS balance sheet.
- Note that IFRS 1 makes=
an
exception from the "split-accounting" provisions of IAS =
32.
If the liability component of a compound financial instrument is no
longer outstanding at the date of the opening IFRS balance sheet, =
the
entity is not required to reclassify out of retained earnings and =
into
other equity the original equity component of the compound instrum=
ent.
e. The
reclassification principle would apply for the purpose of defining
reportable segments under IAS 14.
f. The=
scope
of consolidation might change depending on the consistency of the
previous-GAAP requirements to those in IAS 27. In some cases, IFRS will
require consolidated financial statements where they were not required
before.
g. Some
offsetting (netting) of assets and liabilities or of income and expense
items that had been acceptable under previous GAAP may no longer be
acceptable under IFRS.
4. =
Measurement.
The general measurement principle – there are several significant
exceptions noted below – is to apply IFRS in measuring all recognised assets and liabilities. Therefore, if =
an
entity adopts IFRS for the first time in its annual financial statements
for the year ended 31 December 2005, in general it would use the
measurement principles in IFRSs in force at=
31
December 2005.
5. =
Adjustments
required to move from previous GAAP to IFRS =
at the
time of first-time adoption. These should be recognised
directly in retained earnings or other appropriate category of equity at
the date of transition to IFRSs.
How to rec=
ognise
adjustments required to move from previous GAAP to IFRSs
Adjust=
ments
required to move from previous GAAP to IFRSs at
the time of first-time adoption should be recognis=
ed
directly in retained earnings or, if appropriate, another category of
equity at the date of transition to IFRSs. =
Exceptions to the basic measure=
ment
principle in IFRS 1
1. =
Optional
exceptions. There are some important exceptions to the general
restatement and measurement principles set out above. The following
exceptions are individually optional, not mandatory: =
Bus=
iness
combinations that occurred before opening balance sheet date=
a. An entity may keep the original previous-GAAP accountin=
g,
that is, not restate:
- previous mergers or go=
odwill
written-off from reserves;
- the carrying amounts of
assets and liabilities recognised at t=
he
date of acquisition or merger;
- how goodwill was initially
determined (do not adjust the purchase price allocation on
acquisition).
b. How=
ever, should
it wish to do so, an entity can elect to restate all business combinati=
ons
starting from a date it selects prior to the opening balance sheet date=
.
c. In =
all
cases, the entity must make an initial IAS 36 impairment test of any
remaining goodwill in the opening IFRS balance sheet, after reclassifyi=
ng,
as appropriate, previous GAAP intangibles to goodwill.
d. IFRS 1 includes an appendix explaining how a first-time
adopter should account for business combinations that occurred prior to
transition to IFRS.
Pro=
perty,
plant, and equipment, intangible assets, and investment property carried
under the cost model
a. These assets may be measured at their fair value at the
opening IFRS balance sheet date (this option applies to intangible asse=
ts
only if an active market exists). Fair value becomes the "deemed
cost" going forward under the IFRS cost model. (Deemed cost is an
amount used as a surrogate for cost or depreciated cost at a given date=
.)
b. If,
before the date of its first IFRS balance sheet, the entity had revalued
any of these assets under its previous GAAP either to fair value or to a
price-index-adjusted cost, that previous-GAAP revalued amount at the da=
te
of the revaluation can become the deemed cost of the asset under IFRS. =
c. If,
before the date of its first IFRS balance sheet, the entity had made a
one-time revaluation of assets or liabilities to fair value because of =
a privatisation or initial public offering, and the
revalued amount became deemed cost under the previous GAAP, that amount=
(adjusted
for any subsequent depreciation, amortisation,
and impairment) would continue to be deemed cost after the initial adop=
tion
of IFRS.
IAS=
19 -
Employee benefits: actuarial gains and losses
An ent=
ity
may elect to recognise all cumulative actua=
rial gains
and losses for all defined benefit plans at the opening IFRS balance sh=
eet
date (that is, reset any corridor recognised
under previous GAAP to zero), even if it elects to use the IAS 19 corri=
dor
approach for actuarial gains and losses that arise after first-time
adoption of IFRS. If an entity does not elect to apply this exemption, =
it
must restate all defined benefit plans under IAS 19 since the inception=
of
those plans (which may differ from the effective date of IAS 19). =
IAS=
21 -
Accumulated translation reserves
An ent=
ity
may elect to recognise all translation
adjustments arising on the translation of the financial statements of
foreign entities in accumulated profits or losses at the opening IFRS
balance sheet date (that is, reset the translation reserve included in
equity under previous GAAP to zero). If the entity elects this exemptio=
n,
the gain or loss on subsequent disposal of the foreign entity will be
adjusted only by those accumulated translation adjustments arising after
the opening IFRS balance sheet date. If the entity does not elect to ap=
ply
this exemption, it must restate the translation reserve for all foreign
entities since they were acquired or created.
2. =
Mandatory
exceptions. There are also three important exceptions to the
general restatement and measurement principles set out above that are
mandatory, not optional. These are:
IAS=
39 - Derecognition of financial instruments=
A firs=
t-time
adopter is not permitted to recognise finan=
cial
assets or financial liabilities that had been dere=
cognised
under its previous GAAP in a financial year beginning before 1 January =
2001
(the effective date of IAS 39). This is consistent with the transition
provision in IAS 39.172(a). However, if an SPE was used to effect the derecognition of f=
inancial
instruments and the SPE is controlled at the opening IFRS balance sheet
date, the SPE must be consolidated.
IAS=
39 -
Hedge accounting
The
conditions in IAS 39.122-152 for a hedging relationship that qualifies =
for
hedge accounting are applied as of the opening IFRS balance sheet date.=
The
hedge accounting practices, if any, that were used in periods prior to =
the
opening IFRS balance sheet may not be retrospectively changed. This is
consistent with the transition provision in IAS 39.172(b). Some adjustm=
ents
may be needed to take account of the existing hedging relationships und=
er
previous GAAP at the opening balance sheet date.
Information to be used in prepa=
ring
IFRS estimates retrospectively
In pre=
paring
IFRS estimates retrospectively, the entity must use the inputs and
assumptions that had been used to determine previous GAAP estimates in
periods before the date of transition to IFRS, provided that those inpu=
ts
and assumptions are consistent with IFRS. The entity is not permitted to
use information that became available only after the previous-GAAP
estimates were made except to correct an error.
Changes to disclosures
For ma=
ny
entities, new areas of disclosure will be added that were not requireme=
nts
under the previous GAAP (perhaps segment information, earnings per shar=
e,
discontinuing operations, contingencies, and fair values of all financi=
al
instruments) and disclosures that had been required under previous GAAP
will be broadened (perhaps related party disclosures).
Disclosure of selected financia=
l data
for periods before the first IFRS balance sheet
IAS 1 =
only
requires one year of full comparative financial statements. If a first-=
time
adopter wants to disclose selected financial information for periods be=
fore
the date of the opening IFRS balance sheet, it is not required to conform that information to IFRS. Conforming that
earlier selected financial information to IFRSs
is optional.
If the
entity elects to present the earlier selected financial information bas=
ed
on its previous GAAP rather than IFRS, it must prominently label that
earlier information as not complying with IFRS and, further, it must
disclose the nature of the main adjustments that would make that
information comply with IFRS. This latter disclosure is narrative and n=
ot
necessarily quantified.
Of cou=
rse,
if the entity elects to present more than one year of full comparative
prior period financial statements at the time of its transition to IFRSs, that will change the date of the opening I=
FRS
balance sheet.
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 reported financial position, financial
performance, and cash flows. This includes:
1.
Reconciliations of equity reported under previous GAAP to equity under =
IFRS
both (a) at the date of the opening IFRS balance sheet and (b) the end =
of
the last annual period reported under the previous GAAP. For an entity
adopting IFRSs for the first time in its 31
December 2005 financial statements, the reconciliations would be as of 1
January 2004 and 31 December 2004.
2.
Reconciliations of profit or loss for the last annual period reported u=
nder
the previous GAAP to profit or loss under IFRSs
for the same period.
3. Exp=
lanation
of material adjustments that were made, in adopting IFRSs
for the first time, to the balance sheet, income statement, and cash fl=
ow
statement.
4. If =
errors
in previous-GAAP financial statements were discovered in the course of
transition to IFRSs, those must be separate=
ly
disclosed.
5. If =
the
entity recognised or reversed any impairment
losses in preparing its opening IFRS balance sheet, these must be
disclosed.
6.
Appropriate explanations if the entity has availed itself of any of the
specific recognition and measurement exemptions permitted under IFRS 1 -
for instance, if it used fair values as deemed cost. =
Disclosure of an impending chan=
ge to
IFRS
If an =
entity
is going to adopt IFRS for the first time in its annual financial
statements for the year ended 31 December 2005, certain disclosure are
required in its interim financial statements prior to the 31 December 2=
005
statements, but only those interim financial statements purport to comp=
ly
with IAS 34. Explanatory information and a reconcil=
iation
are required in the interim report that immediately precedes the first =
set
of IFRS annual financial statements. The information includes changes in
accounting policies compared to those under previous GAAP. <=
/span>
Compliance in interim reports i=
n the
year of first-time adoption of IFRS
If an =
entity
that adopts IFRS for the first time in its annual financial statements =
for
the year ended 31 December 2005, it is required to apply IFRS 1 in its
interim financial reports for periods within the year ended 31 December
2005 if those interim reports are described as conforming to Internatio=
nal
Financial Reporting Standards. It would not be required to apply IFRS 1=
if
those interim reports are described as conforming to previous GAAP.
Different IFRS adoption dates o=
f investor
and investee
A pare=
nt or
investor may become a first-time adopter earlier than or later than its
subsidiary, associate, or joint venture investee.
In these cases, IFRS 1 is applied as follows:
1. If =
the
subsidiary has adopted IFRSs in its entity-=
only
financial statements before the group to which it belongs adopts IFRS f=
or
the consolidated financial statements, then the subsidiary's first-time
adoption date is still the date at which it adopted IFRS for the
first-time, not that of the group. However, the group must use the IFRS
measurements of the subsidiary's assets and liabilities for its first I=
FRS
financial statements except for adjustments relating to the business
combinations exemption and to conform group accounting policies. <=
/o:p>
2. If =
the
group adopts IFRSs before the subsidiary ad=
opts IFRSs in its entity-only financial statements, th=
en the
subsidiary has an option either (a) to elect that the group date of IFRS
adoption is its transition date or (b) to first-time adopt in its
entity-only financial statements.
3. If =
the
group adopts IFRSs before the parent adopts=
IFRSs in its entity-only financial statements, th=
en the
parent's first-time adoption date is the date at which the group adopte=
d IFRSs for the first time.
4. If =
the
group adopts IFRSs before its associate or =
joint
venture adopts IFRSs in its entity-only fin=
ancial
statements, then the associate or joint venture should have the option =
to
elect that either the group date of IFRS adoption is its transition dat=
e or
to first-time adopt in its entity-only financial statements.
June 2005:
Amendments to IFRS 6 and IFRS 1 Adopted
On 30 =
June
2005 the IASB issued amendments to IFRS 1 and IFRS 6 to clarify that an
entity that both (a) adopts IFRSs for the f=
irst
time before 1 January 2006 and (b) applies IFRS 6 before that date is
exempted not only from providing comparative prior-period disclosures b=
ut
also from applying the recognition and measurement requirements of IFRS=
6
in the prior comparative period. Click to Download the IASB
Press Release (PDF 48k).
March 2006: IASB Agenda Proposal
— Amendment to IFRS 1 with respect to determining cost of
subsidiaries in separate financial statements of a parent
The IA=
SB
considered a proposal to prepare an amendment to IFRS 1 First-time
Adoption of IFRSs to address problems i=
n the
separate financial statements of the parent.
- Initial cost. In some cases it is
difficult to determine the initial cost of an investment in a
subsidiary in the separate financial statements of a parent, in
accordance with IAS 27 when an entity adopts IFRS for the first ti=
me.
This difficulty has been highlighted by the use of merger relief
accounting in the United
Kingdom and other countries. Un=
der
merger relief accounting, any shares provided as consideration for=
the
purchase of an investment in a subsidiary are recorded (for the
purposes of cost) at their nominal value. This nominal value is not
cost in accordance with IAS 27, which requires that the cost be st=
ated
initially at the amount of consideration paid. <=
/li>
- Post acquisition divid=
ends. IAS 27 requires that =
the
initial cost is adjusted for any dividends paid out of pre-acquisi=
tion
reserves, and impairments. When the cost of investment is restated
under IAS 27, on transition to IFRS, the pre-acquisition retained
earnings would also need to be restated accordingly in order to
determine which distributions are a recovery
of the initial investment. This would require a reconstruction of
pre-acquisition reserves under IFRS. Constituents argue that the
related compliance burden has led to many entities choosing to pre=
pare
the separate financial statements of parent entities in local GAAP
rather than in accordance with IFRS.
These =
issues
had been raised to the IFRIC. The IFIRC referred them to the IASB on the
grounds that this is not a matter of interpretation, the standards are
clear and do not provide any basis for granting the relief sought.
The st=
aff
stated that preparing the amendment would not consume excessive resourc=
es.
The Board concurred and agreed to add this project to its agenda. It was
noted that, although an amendment to IFRS 1, the amendment would not af=
fect
the stable platform (because it applied only to separate financial
statements) and would help IFRSs gain wider
acceptance.
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