IFRS 1 FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
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 preparing its general purpose financial statements.
Definition of first-time adoption
A first-time adopter is an entity that, for the first time, makes an explicit and unreserved statement that its general purpose financial statements comply with IFRSs. [IFRS 1.3]
An entity 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 made available to owners or external parties such as investors or creditors. If a set of IFRS financial statements was, for any reason, made available to owners or external parties in the preceding year, then the entity will already be considered to be on IFRSs, and IFRS 1 does not apply. [IFRS 1.3]
An entity can also be a first-time adopter if, in the preceding year, its financial statements: [IFRS 1.3]
- asserted compliance with some but not all IFRSs, or
- 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 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.
Overview for an entity that adopts IFRSs for the first time in its annual financial statements for the year ended 31 December 2009
Select accounting policies based on IFRSs effective at 31 December 2009.
IFRS reporting periods
Prepare at least 2009 and 2008 financial statements and the opening balance sheet (as of 1 January 2008 or beginning of the first period for which full comparative financial statements are presented, if earlier) by applying the IFRSs effective at 31 December 2009. [IFRS 1.7]
Since IAS 1 requires that at least one year of comparative prior period financial information be presented, the opening balance sheet will be 1 January 2008 if not earlier. This would mean that an entity’s first financial statements should include at least: [IFRS 1.21]
- three balance sheets (statements of financial position)
- two statements of comprehensive income
- two separate income statements (if presented)
- two statements of cash flows
- two statements of changes in equity and
- related notes, including comparative information
- three balance sheets (statements of financial position)
- If a 31 December 2009 adopter reports selected financial data (but not full financial statements) on an IFRS basis for periods prior to 2008, in addition to full financial statements for 2008 and 2009, that does not change the fact that its opening IFRS balance sheet is as of 1 January 2008.
Adjustments required to move from previous GAAP to IFRSs at the time of first-time adoption
Derecognition of some previous GAAP assets and liabilities
The entity should eliminate previous-GAAP assets and liabilities from the opening balance sheet if they do not qualify for recognition under IFRSs. [IFRS 1.10(b)] For example:
IAS 38 does not permit recognition of expenditure on any of the following as an intangible asset:
- start-up, pre-operating, and pre-opening costs
- advertising and promotion
- moving and relocation
If the entity’s previous GAAP had recognised these as assets, they are eliminated in the opening IFRS balance sheet
- If the entity’s previous GAAP had allowed accrual of liabilities for “general reserves”, restructurings, future operating losses, or major overhauls that do not meet the conditions for recognition as a provision under IAS 37, these are eliminated in the opening IFRS balance sheet
- If the entity’s previous GAAP had allowed recognition of contingent assets as defined in IAS 37.10, these are eliminated in the opening IFRS balance sheet
Recognition of some assets and liabilities not recognised under previous GAAP
Conversely, the entity should recognise all assets and liabilities that are required to be recognised by IFRS even if they were never recognised under previous GAAP. [IFRS 1.10(a)] For example:
- IAS 39 requires recognition of all derivative financial assets and liabilities, including embedded derivatives. These were not recognised under many local GAAPs.
- IAS 19 requires an employer to recognise a liability when an employee has provided service in exchange for benefits to be paid in the future. These are not just post-employment benefits (eg, pension plans) but also obligations for medical and life insurance, vacations, termination benefits, and deferred compensation. In the case of ‘over-funded’ defined benefit plans, this would be a plan asset.
- IAS 37 requires recognition of provisions as liabilities. Examples could include an entity’s obligations for restructurings, onerous contracts, decommissioning, remediation, site restoration, warranties, guarantees, and litigation.
- Deferred tax assets and liabilities would be recognised in conformity with IAS 12.
The entity should reclassify previous-GAAP opening balance sheet items into the appropriate IFRS classification. [IFRS 1.10(c)] Examples:
- IAS 10 does not permit classifying dividends declared or proposed after the balance sheet date as a liability at the balance sheet date. If such liability was recognised under previous GAAP it would be reversed in the opening IFRS balance sheet.
- If the entity’s previous GAAP had allowed treasury stock (an entity’s own shares that it had purchased) to be reported as an asset, it would be reclassified as a component of equity under IFRS.
- Items classified as identifiable intangible assets in a business combination accounted for under the previous GAAP may be required to be reclassified as goodwill under IFRS 3 because they do not meet the definition of an intangible asset under IAS 38. The converse may also be true in some cases.
IAS 32 has principles for classifying items as financial liabilities or equity. Thus mandatorily redeemable preferred shares 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 instrument.
- The reclassification principle would apply for the purpose of defining reportable segments under IFRS 8.
- 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.
- 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.
The general measurement principle – there are several significant exceptions noted below – is to apply effective IFRSs in measuring all recognised assets and liabilities. [IFRS 1.10(d)]
How to recognise adjustments required to move from previous GAAP to IFRSs
Adjustments required to move from previous GAAP to IFRSs at the time of first-time adoption should be recognised directly in retained earnings or, if appropriate, another category of equity at the date of transition to IFRSs. [IFRS 1.11]
In preparing IFRS estimates at the date of transition to IFRSs retrospectively, the entity must use the inputs and assumptions that had been used to determine previous GAAP estimates as of that date (after adjustments to reflect any differences in accounting policies). The entity is not permitted to use information that became available only after the previous GAAP estimates were made except to correct an error. [IFRS 1.14]
Changes to disclosures
For many entities, new areas of disclosure will be added that were not requirements under the previous GAAP (perhaps segment information, earnings per share, discontinuing operations, contingencies and fair values of all financial instruments) and disclosures that had been required under previous GAAP will be broadened (perhaps related party disclosures).
Disclosure of selected financial data for periods before the first IFRS balance sheet
If a first-time adopter wants to disclose selected financial information for periods before 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.[IFRS 1.22]
If the entity elects to present the earlier selected financial information based 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 not necessarily quantified.[IFRS 1.22]
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. [IFRS 1.23] This includes:
- 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. [IFRS 1.24(a)] (For an entity adopting IFRSs for the first time in its 31 December 2009 financial statements, the reconciliations would be as of 1 January 2008 and 31 December 2008.)
- reconciliations of total comprehensive income for the last annual period reported under the previous GAAP to total comprehensive income under IFRSs for the same period [IFRS 1.24(b)]
- explanation of material adjustments that were made, in adopting IFRSs for the first time, to the balance sheet, income statement and cash flow statement [IFRS 1.25]
- if errors in previous GAAP financial statements were discovered in the course of transition to IFRSs, those must be separately disclosed [IFRS 1.26]
- if the entity recognised or reversed any impairment losses in preparing its opening IFRS balance sheet, these must be disclosed [IFRS 1.24(c)]
- appropriate explanations if the entity has elected to apply any of the specific recognition and measurement exemptions permitted under IFRS 1 – for instance, if it used fair values as deemed cost
Disclosures in interim financial reports
If an entity is going to adopt IFRSs for the first time in its annual financial statements for the year ended 31 December 2009, certain disclosure are required in its interim financial statements prior to the 31 December 2009 statements, but only if those interim financial statements purport 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. [IFRS 1.32]
Exceptions to the retrospective application of other IFRSs
Prior to 1 January 2010, there were three exceptions to the general principle of retrospective application. On 23 July 2009, IFRS 1 was amended, effective 1 January 2010, to add two additional exceptions with the goal of further simplifying the transition to IFRSs for first-time adopters. The five exceptions are: [IFRS 1.Appendix B]
IAS 39 – Derecognition of financial instruments
A first-time adopter shall apply the derecognition requirements in IAS 39 prospectively for transactions occurring on or after 1 January 2004. However, the entity may apply the derecognition requirements retrospectively provided that the needed information was obtained at the time of initially accounting for those transactions. [IFRS 1.B2-3]
IAS 39 – Hedge accounting
The general rule is that the entity shall not reflect in its opening IFRS balance sheet (statement of financial position) a hedging relationship of a type that does not qualify for hedge accounting in accordance with IAS 39. However, if an entity designated a net position as a hedged item in accordance with previous GAAP, it may designate an individual item within that net position as a hedged item in accordance with IFRS, provided that it does so no later than the date of transition to IFRSs. [IFRS 1.B5]
IAS 27 – Non-controlling interest
IFRS 1.B7 lists specific requirements of IAS 27(2008) that shall 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 leasing contract made the same type of determination of whether an arrangement contained a lease in accordance with previous GAAP as that required by IFRIC 4 Determining whether an Arrangement Contains a Lease, but at a date other than that required by IFRIC 4, the amendments exempt the entity from having to apply IFRIC 4 when it adopts IFRSs.
Optional exemptions from the basic measurement principle in IFRS 1
There are some further optional exemptions to the general restatement and measurement principles set out above. The following exceptions are individually optional. They relate to:
- business combinations [IFRS 1.Appendix C]
and 14 others [IFRS 1.Appendix D]:
- share-based payment transactions
- insurance contracts
- fair value or revaluation as deemed cost
- employee benefits
- cumulative translation differences
- investments in subsidiaries, jointly controlled entities, associates and joint ventures
- assets and liabilities of subsidiaries, associated and joint ventures
- compound financial instruments
- designation of previously recognised financial instruments
- fair value measurement of financial assets or financial liabilities at initial recognition
- decommissioning liabilities included in the cost of property, plant and equipment
- financial assets or intangible assets accounted for in accordance with IFRIC 12 Service Concession Arrangements
- borrowing costs
- share-based payment transactions
Some, but not all, of them are described below.
Business combinations that occurred before opening balance sheet date
IFRS 1 includes Appendix C explaining how a first-time adopter should account for business combinations that occurred prior to transition to IFRS.
An entity may keep the original previous GAAP accounting, that is, not restate:
- previous mergers or goodwill written-off from reserves
- the carrying amounts of assets and liabilities recognised at the date of acquisition or merger or
- how goodwill was initially determined (do not adjust the purchase price allocation on acquisition)
However, should it wish to do so, an entity can elect to restate all business combinations starting from a date it selects prior to the opening balance sheet date.
In all cases, the entity must make an initial IAS 36 impairment test of any remaining goodwill in the opening IFRS balance sheet, after reclassifying, as appropriate, previous GAAP intangibles to goodwill.
The exemption for business combinations also applies to acquisitions of investments in associates and of interests in joint ventures.
Fair value or revaluation as deemed cost
Assets carried at cost (e.g. property, plant and equipment) may be measured at their fair value at the opening IFRS balance sheet date. 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. [IFRS 1.D6]
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 date of the revaluation can become the deemed cost of the asset under IFRS. [IFRS 1.D6]
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 would continue to be deemed cost after the initial adoption of IFRS. [IFRS 1.D8]
This option applies to intangible assets only if an active market exists. [IFRS 1.D7]
IAS 19 – Employee benefits: actuarial gains and losses
An entity may elect to recognise all cumulative actuarial gains and losses for all defined benefit plans at the opening IFRS balance sheet date (that is, reset any corridor recognised under previous GAAP to zero), even if it elects to use the IAS 19 corridor approach for actuarial gains and losses that arise after first-time adoption of IFRS. If a first-time adopter uses this exemption, it shall apply it to all plans. [IFRS 1.D10]
IAS 21 – Accumulated translation reserves
An entity 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 exemption, 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. [IFRS 1.D13]
IAS 27 – Investments in separate financial statements
In May 2008, the IASB amended the standard to change the way the cost of an investment in the separate financial statements is measured on first-time adoption of IFRSs. The amendments to IFRS 1:
- allow first-time adopters to use a ‘deemed cost’ of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements
- remove the definition of the cost method from IAS 27 and add a requirement to present dividends as income in the separate financial statements of the investor
- require that, when a new parent is formed in a reorganisation, the new parent must measure the cost of its investment in the previous parent at the carrying amount of its share of the equity items of the previous parent at the date of the reorganisation
Assets and liabilities of subsidiaries, associates and joint ventures: different IFRS adoption dates of investor and investee
If a subsidiary becomes a first-time adopter later than its parent, IFRS 1 permits a choice between two measurement bases in the subsidiary’s separate financial statements. In this case, a subsidiary should measure its assets and liabilities as either: [IFRS 1.D16]
- the carrying amount that would be included in the parent’s consolidated financial statements, based on the parent’s date of transition to IFRSs, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary or
- the carrying amounts required by IFRS 1 based on the subsidiary’s date of transition to IFRSs
A similar election is available to an associate or joint venture that becomes a first-time adopter later than an entity that has significant influence or joint control over it. [IFRS 1.D16]
If a parent becomes a first-time adopter later than its subsidiary, the parent should in its consolidated financial statements, measure the assets and liabilities of the subsidiary at 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 applies in the case of associates and joint ventures. [IFRS 1.D17]
On 23 July 2009, the IASB amended IFRS 1 to:
- exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets.
- exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance with IFRIC 4 Determining whether an Arrangement contains a Lease when the application of their national accounting requirements produced the same result.
On 26 November 2009, the IASB issued an exposure draft (ED) proposing to amend IFRS 1 to state that an entity need not provide the comparative prior-period information required by the March 2009 amendments to IFRS 7 Improving Disclosures about Financial Instruments for first-time adopters adopting before 1 January 2010. As a result, IFRS 1, Appendix E, paragraph E1 will be amended as follows:
E1 A first-time adopter may apply the transitional provisions in paragraph 44G of IFRS 7 to the extent that the entity’s first IFRS reporting period starts earlier than 1 January 2010.
The proposed limited exemption from comparative IFRS 7 disclosures for first-time adopters is consistent with the exemption permitted for early adopters of the March 2009 amendments to IFRS 7. Deadline for comments on the ED is 29 December 2009.
On 28 January 2010, the IASB amended IFRS 1 to exempt first-time adopters of IFRSs from providing the additional disclosures introduced in March 2009 by Improving Disclosures about Financial Instruments (Amendments to IFRS 7). The amendment gives first-time adopters the same transition provisions that Amendments to IFRS 7 provides to current IFRS preparers. The amendment is effective on 1 July 2010, with earlier application permitted.