7.10 IAS 29 – Financial Reporting in Hyperinflationary Economies ................ 346
7.11 IFRS
11 – Joint Arrangements ........................................................................... 346
7.12 IAS
36 – Impairment of Assets ......................................................................... 346
7.13 IAS
37 – Provisions, Contingent Liabilities and Contingent Assets .............. 347
7.14 IAS
38 – Intangible Assets ................................................................................. 348
8 REGULATORY ISSUES ................................................................................... 349
8.1
First-time adoption by foreign private issuers that are SEC
registrants .............................................................................................................. 349
8.1.1
SEC guidance........................................................................................ 349
8.1.2 IPTF
guidance ....................................................................................... 351
8.2
Disclosure of IFRS information in financial statements for periods
prior to an entity’s first IFRS reporting period ............................................... 353
8.2.1
IFRS guidance ....................................................................................... 353
8.2.2
Disclosure of expected changes in accounting policies ............... 354
List of examples
Example 5.1:
Scope of application of IFRS 1 .......................................................... 220
Example 5.2:
Entity applying national GAAP and IFRSs ..................................... 220
Example 5.3:
First IFRS financial statements outside the annual report
or statutory financial statements ....................................................... 221
Example 5.4:
Repeated application of IFRS 1 when an entity does not
apply IFRSs for one year .................................................................... 222
Example 5.5:
Determining the date of transition to IFRSs .................................. 226
Example 5.6:
Prohibition from applying superseded standards ......................... 228
Example 5.7:
Order of application of exemptions .................................................. 231
Example 5.8:
Application of IFRS 1 to estimates ................................................... 234
Example 5.9:
Unrecognised gains and losses on existing cash flow hedge........ 241
Example 5.10:
Pre-transition cash flow hedges ....................................................... 243
Example 5.11:
Existing fair value hedges................................................................... 244
Example 5.12:
Government loan with below-market interest rate ..................... 248
Example 5.13:
Acquisition of assets ............................................................................ 250
Example 5.14:
Items not recognised under previous GAAP ................................. 254
Example 5.15:
Restructuring provision ....................................................................... 255
216 Chapter
5
Example 5.16:
Provisionally determined fair values ................................................ 255
Example 5.17:
Items measured on a cost basis ......................................................... 256
Example 5.18:
Items not measured at original cost .................................................. 257
Example 5.19:
Business combination example ........................................................ 258
Example 5.20:
Recognition and derecognition of acquired intangible
assets ...................................................................................................... 259
Example 5.21:
Impairment testing of goodwill on first-time adoption ............... 260
Example 5.22:
Previous GAAP impairment of goodwill embedded in
equity method investment .................................................................. 261
Example 5.23:
Adjusting goodwill ............................................................................... 262
Example 5.24:
Goodwill deducted from equity and treatment of related
intangible assets ................................................................................... 263
Example 5.25:
Goodwill related to foreign net investments ................................. 263
Example 5.26:
Adjustments made during measurement period to
provisional amounts ............................................................................. 264
Example 5.27:
Subsidiary not consolidated under previous GAAP ..................... 266
Example 5.28:
Calculation of deemed cost of goodwill ......................................... 266
Example 5.29:
Restatement of intangible assets, deferred tax and non-
controlling interests............................................................................. 268
Example 5.30:
Deemed cost of property, plant and equipment ............................ 277
Example 5.31:
Determining whether an arrangement contains a lease .............. 284
Example 5.32:
Parent adopts IFRSs before subsidiary ............................................ 291
Example 5.33:
Interaction between D16 (a) of IFRS 1 and the business
combination exemptions applied by its parent ............................. 292
Example 5.34:
Subsidiary adopts IFRSs before parent ........................................... 293
Example 5.35:
Limited ability to choose first-time adoption exemptions ......... 294
Example 5.36:
Decommissioning component in property, plant and
equipment ............................................................................................. 299
Example 5.37:
Reconciliations to be presented in first IFRS financial
statements .............................................................................................. 318
Example 5.38:
Reconciliations to be presented in IFRS half-year reports ........ 330
Example 5.39:
Reconciliations to be presented in IFRS quarterly reports ........ 330
Example 5.40:
Remeasurement of deferred tax asset recognised as the
result of retrospective application ....................................................339
Example 5.41:
Revaluation reserve under IAS 16 ..................................................... 341
217
Chapter 5
First-time adoption
1 INTRODUCTION
1.1
Objectives of first-time adoption
In principle, a first-time adopter should prepare financial statements as if it had always
applied IFRSs. Although entities routinely have to apply new accounting standards by
way of prior year adjustment, adopting IF
RSs, a new basis of accounting, is a challenging
undertaking and poses a distinct set of problems. One cannot underestimate the
magnitude of the effort involved in adopting a large number of new accounting
standards. The requirements of individual standards will often differ significantly from
those under an entity’s previous GAAP and information may need to be collected that
was not required under the previous GAAP.
IFRS 1 – First-time Adoption of International Financial Reporting Standards – has a
rather limited objective, to ensure that an entity’s first IFRS financial statements, and its
interim financial reports for part of the period covered by those first IFRS financial
statements, contain high quality financial information that:
• is transparent for users and comparable over all periods presented;
• provides a suitable starting point for accounting in accordance with IFRSs; and
• can be generated at a cost that does not exceed the benefits. [IFRS 1.1].
It is important for users to be mindful of this objective as it provides the principal
rationale underlying many of the decisions reflected in the standard, in particular the
various exceptions that require, and exemptions that allow, a first-time adopter to
deviate from the general rule.
Although IFRS 1 owes its existence to the 2005 adoption of IFRSs by EU companies
whose securities are traded on an EU regulated market,1 one of the IASB’s aims was
‘to find solutions that would be appropriate for any entity, in any part of the world,
regardless of whether adoption occurs in 2005 or at a different time’. [IFRS 1.BC3].
IFRS 1 had to be written in a way that completely ignores a first-time adopter’s
previous GAAP. This means that first-time adoption exemptions are made available
to all first-time adopters, including those whose previous GAAP was very close to
IFRSs. A first-time adopter that so desires will be able to make considerable
adjustments to its opening IFRS statement of financial position, using the available
218 Chapter
5
exemptions in IFRS 1, even if the differences between its previous GAAP and IFRSs
were only minor. Yet, it may also be required to make considerable adjustments due
to the requirement to use the same IFRS standards for all periods presented in the
first IFRS financial statements.
Another issue is the potential for lack of comparability between different first-time
adopters, and between first-time adopters and entities already applying IFRSs.
[IFRS 1.BC9]. The IASB ultimately decided that it was more important to achieve
‘comparability over time within a first-time adopter’s first IFRS financial statements and
between different entities adopting IFRSs for the first time at a given date; achieving
comparability between first-time adopters and entities that already apply IFRSs is a
secondary objective.’ [IFRS 1.BC10].
A revised IFRS 1 was issued in November 2008, which retains the substance of the
previous version of the standard but within a changed structure. [IFRS 1.IN2]. The
standard has been further amended as a result of the IASB’s annual improvements
process, consequential amendments resulting from issuance of new standards, as well
as to provide limited exemptions that address specific matters. This approach always
carried the risk that its complexity might eventually overwhelm its practical
application. All these amendments are incorporated into the applicable sections of
this chapter.
1.2 Authoritative
literature
This chapter generally discusses the requirements of IFRS 1 for accounting periods
beginning on or after 1 January 2019 unless otherwise stated and reflects the
amendments to the original version of IFRS 1 referred to at 1.1 above.
This chapter does not deal with the first-time adoption of the earlier versions of IFRS 1.
A detailed discussion of the first-time adoption using the earlier versions of the standard
can be found in Chapter 5 of the previous editions of this book, International GAAP 2018
and prior editions. Especially, entities that elect to continue applying IAS 39 – Financial
Instruments: Recognition and Measurement – should refer to previous editions of IGAAP
for guidance.
1.3 Defined
terms
IFRS 1 defines the following terms in connection with the transition to IFRSs: [IFRS 1 Appendix A]
Date of transition to IFRSs: The beginning of the earliest period for which an entity
presents full comparative information under IFRSs in its first IFRS financial statements.
First IFRS financial statements: The first annual financial statements in which an entity
adopts International Financial Reporting Standards, by an explicit and unreserved
statement of compliance with IFRSs.
First IFRS reporting period: The latest reporting period covered by an entity’s first IFRS
financial statements.
First-time adopter: An entity that presents its first IFRS financial statements.
International Financial Reporting Standards: Standards and Interpretations issued by
the International Accounting Standards Board (IASB). They comprise:
First-time
adoption
219
(a) International
Financial Reporting Standards;
(b) International
Accounting
Standards;
(c) IFRIC Interpretations (Interpretations developed by the IFRS Interpretations
Committee); and
(d) SIC Interpretations (Interpretations of the former Standing Interpretations Committee).
Opening IFRS statement of financial position: An entity’s statement of financial position
(i.e. balance sheet) at the date of transition to IFRSs.
Previous GAAP: The basis of accounting that a first-time adopter used immediately
before adopting IFRSs.
1.4 Future
developments
As at the time of writing, there was no specific project dealing with IFRS 1 other than
the accounting treatment of cumulative translation differences of a subsidiary that
becomes a first-time adopter later than its parent (see 5.9.1.A below). However, the IASB
is currently pursuing a number of projects. Consideration will be given at the time of
deliberations to how new standards or amendments may impact a first-time adopter of
IFRSs and resulting consequential amendments to IFRS 1 will be included in the new
standards or amendments. Entities contemplating conversion to IFRSs should monitor
the IASB’s agenda in order to anticipate how future standards or amendments may affect
their conversions.
2
WHO IS A FIRST-TIME ADOPTER?
2.1
The first IFRS financial statements in scope of IFRS 1
An entity’s first IFRS financial statements are the first annual financial statements in
which the entity adopts IFRSs, by making in those financial statements an explicit
and unreserved statement of compliance with IFRSs. [IFRS 1.3, Appendix A]. The standard
provides description of the circumstances in which an entity is a first-time adopter
and therefore is within the scope of this standard. These circumstances are
discussed below.
An entity’s financial statements are considered its first IFRS financial statements, and thus fall
/>
within the scope of IFRS 1, when it presented its most recent previous financial statements:
(i) in accordance with national requirements that are not consistent with IFRSs in all
respects;
(ii) in conformity with IFRSs in all respects, except that the financial statements did
not contain an explicit and unreserved statement that they complied with IFRSs;
(iii) with an explicit statement of compliance with some, but not all, IFRSs;
(iv) in accordance with national requirements inconsistent with IFRSs, but use some
individual IFRSs to account for items for which national requirements did not exist;
or
(v) in accordance with national requirements, with a reconciliation of some amounts
to the amounts determined in accordance with IFRSs. [IFRS 1.3(a)].
220 Chapter
5
An entity whose most recent previous financial statements contained an explicit and
unreserved statement of compliance with IFRSs can never be considered a first-time
adopter. This is the case even in the following circumstances:
• the entity issued financial statements containing an explicit and unreserved
statement of compliance with IFRSs despite the fact that the auditors issued a
qualified audit report on those IFRS financial statements. By contrast, an entity that
makes a statement of compliance that excludes any IFRSs will still be a first-time
adopter (see Example 5.1 below);
• the entity issued financial statements claiming to comply both with national GAAP
and IFRSs; or
• the entity stops presenting a separate set of financial statements under national
requirements, which was presented in addition to its IFRS financial statements (see
Example 5.2 below). [IFRS 1.4].
The IASB could have introduced special rules that would have required an entity that
significantly departed from IFRSs to apply IFRS 1. However, the IASB considered that
such rules would lead to ‘complexity and uncertainty’. [IFRS 1.BC5]. In addition, this would
have given entities applying ‘IFRS-lite’ (entities not applying IFRSs rigorously in all
respects e.g. applying IFRSs except for certain standards and interpretations) an option
to side step the requirements of IAS 8 – Accounting Policies, Changes in Accounting
Estimates and Errors – to disclose departures from IFRSs as errors. [IFRS 1.BC6].
The following examples illustrate certain scenarios in connection with determining
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 44