that a first-time adopter of IFRSs is effectively required to apply IAS 28 as if it had
always done so. For some first-time adopters, this may mean application of the equity
method for the first time. For the majority of first-time adopters, however, the issue is
likely to be that they are already applying the equity method under their previous
GAAPs and will now need to identify the potentially significant differences between the
methodologies of the equity method under their previous GAAP and under IAS 28.
In particular there may be differences between:
• the criteria used to determine which investments are associates or joint ventures;
• the elimination of transactions between investors or joint venturers and associates
or joint ventures;
• the treatment of loss-making associates or joint ventures;
• the permitted interval between the reporting dates of an investor or a joint
venturer and an associate or joint ventures with non-coterminous year-ends;
• the treatment of investments in entities formerly classified as associates or joint
venture; and
• the requirement for uniform accounting policies between the investor or joint
venturer and the associate or joint venture.
7.9.1
Transition impairment review
A first-time adopter of IFRSs is required by IFRS 1 to perform an impairment test in
accordance with IAS 36 to any goodwill recognised at the date of transition to IFRSs,
regardless of whether there is any indication of impairment. [IFRS 1.C4(g)(ii)]. IFRS 1
specifically notes that its provisions with regard to past business combinations apply also
to past acquisitions of investments in associates, interests in joint ventures and interests in
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joint operations (in which the activity of the joint operation constitutes a business, as
defined in IFRS 3). [IFRS 1.C5]. Therefore, a transition impairment review must be
undertaken for investments in associates or joint venture whose carrying value includes
an element of goodwill. This impairment review will, however, need to be carried out on
the basis required by IAS 28 as described in Chapter 11. See also 5.2.5 above.
7.10 IAS
29 – Financial Reporting in Hyperinflationary Economies
The IASB decided not to exempt first-time adopters from retrospective application of
IAS 29 because hyperinflation can make unadjusted financial statements meaningless or
misleading. [IFRS 1.BC67].
Therefore, in preparing its opening IFRS statement of financial position a first-time
adopter should apply IAS 29 to any periods during which the economy of the functional
currency or presentation currency was hyperinflationary. [IFRS 1.IG32]. However, to make
the restatement process less onerous, a first-time adopter may want to consider using
fair value as deemed cost for property, plant and equipment (see 5.5.1 above).
[IFRS 1.D5, IG33]. This exemption is also available to other long-lived assets such as
investment properties, right-of-use assets under IFRS 16 and certain intangible assets.
[IFRS 1.D7]. If a first-time adopter applies the exemption to use fair value or a revaluation
as deemed cost, it applies IAS 29 to periods after the date for which the revalued amount
or fair value was determined. [IFRS 1.IG34].
7.11 IFRS
11 – Joint Arrangements
The ‘business combinations’ exemption described at 5.2 above is also applicable to joint
ventures and joint operations in which the activity of the joint operation constitutes a
business, as defined by IFRS 3. Also, the first-time adoption exemptions that are
available for investments in associates can also be applied to investments in joint
ventures (see 7.9 above) and the requirements to test the investment in associates for
impairment at the transition date regardless of whether there were indicators of
impairment will need to be applied (see 5.2.5 and 7.9.1 above). [IFRS 1.C4(g)(ii)].
With respect to joint operations, the requirements of IFRS 11 may well result in the ‘re-
recognition’ of assets that were transferred to others and therefore not recognised under
previous GAAP. A joint operator is required to recognise its assets and liabilities,
including its share of those assets that are jointly held and liabilities that are jointly
incurred, based on the requirements of IFRSs applicable to such assets or liabilities.
[IFRS 11.20-23].
7.12 IAS
36 – Impairment of Assets
As far as goodwill is concerned, first time adopters of IFRSs are required by IFRS 1 to
subject all goodwill carried in the statement of financial position at the date of transition
to an impairment test, regardless of whether there are any indicators of impairment
(see 5.2.5 above). [IFRS 1.C4(g)(ii)].
While IFRS 1 does not specifically call for an impairment test of other assets, a first-time
adopter should be mindful that there are no exemptions in IFRS 1 from full retrospective
application of IAS 36. The implementation guidance reminds a first-time adopter to:
First-time
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(a) determine whether any impairment loss exists at the date of transition to IFRSs;
and
(b) measure any impairment loss that exists at that date, and reverse any impairment
loss that no longer exists at that date. An entity’s first IFRS financial statements
include the disclosures that IAS 36 would have required if the entity had
recognised those impairment losses or reversals in the period beginning with the
date of transition to IFRSs. [IFRS 1.IG39, IFRS 1.24(c)].
As impairment losses for non-financial long-lived assets other than goodwill can be
reversed under IAS 36, in many instances, there will be no practical difference between
applying IAS 36 fully retrospectively and applying it at the transition date. Performing
the test under IAS 36 at transition date should result in re-measuring any previous GAAP
impairment to comply with the approach in IAS 36 and recognition of any additional
impairment or reversing any previous GAAP impairment that is no longer necessary.
The estimates used to determine whether a first-time adopter recognises an impairment
loss or provision at the date of transition to IFRSs should be consistent with estimates
made for the same date under previous GAAP (after adjustments to reflect any
difference in accounting policies), unless there is objective evidence that those
estimates were in error. [IFRS 1.IG40]. If a first-time adopter needs to make estimates and
assumptions that were not necessary under its previous GAAP, they should not reflect
conditions that arose after the date of transition to IFRSs. [IFRS 1.IG41].
If a first-time adopter’s opening IFRS statement of financial position reflects impairment
losses, it recognises any later reversal of those impairment losses in profit or loss unless
IAS 36 requires that reversal to be treated as a revaluation. This applies to both
impairment losses recognised under previous GAAP and additional impairment losses
recognised on transition to IFRSs. [IFRS 1.IG43].
An impairment test might be more appropriate if a first-time adopter makes use of any
of the deemed cost exemptions. In arguing that it is not necessary to restrict ap
plication
of the deemed cost exemption to classes of assets to prevent selective revaluations, the
IASB effectively relies on IAS 36 to avoid overvaluations:
‘IAS 36 requires an impairment test if there is any indication that an asset is
impaired. Thus, if an entity uses fair value as deemed cost for assets whose fair
value is above cost, it cannot ignore indications that the recoverable amount of
other assets may have fallen below their carrying amount. Therefore, IFRS 1 does
not restrict the use of fair value as deemed cost to entire classes of asset.’
[IFRS 1.BC45].
7.13 IAS
37 – Provisions, Contingent Liabilities and Contingent Assets
The main issue for a first-time adopter in applying IAS 37 is that IFRS 1 prohibits
retrospective application of some aspects of IFRSs relating to estimates. This is
discussed in detail at 4.2 above. Briefly, the restrictions are intended to prevent an entity
from applying hindsight and making ‘better’ estimates as at the date of transition. Unless
there is objective evidence that those estimates were in error, recognition and
measurement are to be consistent with estimates made under previous GAAP, after
adjustments to reflect any difference in accounting policies. The entity has to report the
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5
impact of any later revisions to those estimates as an event of the period in which it
makes the revisions. [IFRS 1.IG40]. An entity cannot use hindsight in determining the
provisions to be included under IAS 37 at the end of the comparative period within its
first IFRS financial statements as these requirements also apply at that date. [IFRS 1.14-17].
At the date of transition, an entity may also need to make estimates that were not
necessary under its previous GAAP. Such estimates and assumptions must not reflect
conditions that arose after the date of transition to IFRSs. [IFRS 1.IG41].
If application of IAS 37 changes the way an entity accounts for provisions it needs to
consider whether there are any consequential changes, for example:
• derecognition of a provision for general business risks may mean that assets in the
related cash-generating unit are impaired; and
• remeasurement of a decommissioning provision may indicate that the
decommissioning component of the corresponding asset needs to be reconsidered
(see Chapter 27).
The above list is not exhaustive and a first-time adopter should carefully consider
whether changes in other provisions have a consequential impact.
7.14 IAS
38 – Intangible Assets
An entity’s opening IFRS statement of financial position: [IFRS 1.IG44]
(a) excludes all intangible assets and other intangible items that do not meet the
criteria for recognition under IAS 38 at the date of transition to IFRSs; and
(b) includes all intangible assets that meet the recognition criteria in IAS 38 at that
date, except for intangible assets acquired in a business combination that were not
recognised in the acquirer’s consolidated statement of financial position under
previous GAAP and also would not qualify for recognition under IAS 38 in the
acquiree’s separate statement of financial position (see 5.2.4.B above).
IAS 38 imposes a number of criteria that restrict capitalisation of internally generated
intangible assets. An entity is prohibited from using hindsight to conclude
retrospectively that the recognition criteria are met, thereby capitalising an amount
previously recognised as an expense. [IAS 38.71]. A first-time adopter of IFRSs must be
particularly careful that, in applying IAS 38 retrospectively as at the date of transition, it
does not capitalise costs incurred before the standard’s recognition criteria were met.
Therefore, a first-time adopter is only permitted to capitalise the costs of internally
generated intangible assets when it:
(a) concludes, based on an assessment made and documented at the date of that
conclusion, that it is probable that future economic benefits from the asset will
flow to the entity; and
(b) has a reliable system for accumulating the costs of internally generated intangible
assets when, or shortly after, they are incurred. [IFRS 1.IG46].
In other words, it is not permitted under IFRS 1 to reconstruct retrospectively the costs
of intangible assets.
If an internally generated intangible asset qualifies for recognition at the date of
transition, it is recognised in the entity’s opening IFRS statement of financial position
First-time
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349
even if the related expenditure had been expensed under previous GAAP. If the asset
does not qualify for recognition under IAS 38 until a later date, its cost is the sum of the
expenditure incurred from that later date. [IFRS 1.IG47]. However, a first-time adopter that
did not capitalise internally generated intangible assets is unlikely to have the type of
documentation and systems required by IAS 38 and will therefore not be able to
capitalise these items in its opening IFRS statement of financial position. Going forward,
a first-time adopter will need to implement internal systems and procedures that enable
it to determine whether or not any future internally generated intangible assets should
be capitalised (for example, in the case of development costs).
Capitalisation of separately acquired intangible assets will generally be easier because
there is usually contemporaneous documentation prepared to support the investment
decisions. [IFRS 1.IG48]. However, if an entity that used the business combinations
exemption did not recognise an intangible asset acquired in a business combination
under its previous GAAP, it would only be able to do so upon first-time adoption if the
intangible asset were to qualify for recognition under IAS 38 in the acquiree’s statement
of financial position (see 5.2.4.B above). [IFRS 1.IG49].
If a first-time adopter’s amortisation methods and rates under previous GAAP are
acceptable under IFRSs, the entity does not restate the accumulated amortisation in its
opening IFRS statement of financial position. Instead, the entity accounts for any change
in estimated useful life or amortisation pattern prospectively from the period when it
makes that change in estimate. If an entity’s amortisation methods and rates under
previous GAAP differ from those acceptable in accordance with IFRSs and those
differences have a material effect on the financial statements, the entity would adjust
the accumulated amortisation in its opening IFRS statement of financial position.
[IFRS 1.IG51].
The useful life and amortisation method of an intangible asset should be reviewed at
least each financial year end (see Chapter 17), which is often something that is not
required under a first-time adopter’s previous GAAP. [IAS 38.104].
8 REGULATORY
ISSUES
8.1
First-time adoption by foreign private issuers that are SEC
registrants
8.1.1 SEC
guidance
A foreign private issuer that is registered with the US Securities and Exchange
Commission (SEC) is normally required to present two comparative periods for its
statement of profit or loss and other
comprehensive income (or statement of profit or
loss, if presented), statement of cash flows and statement of changes in equity.
Converting two comparative periods to IFRSs was considered to be a significant burden
to companies. Therefore, in April 2005, the SEC published amendments to Form 20-F
that provided for a limited period a two-year accommodation for foreign private issuers
that were first-time adopters of IFRSs.8 In March 2008, the SEC extended indefinitely
the two-year accommodation to all foreign private issuers that are first-time adopters
of IFRSs as issued by the IASB.9
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The amendment states that ‘an issuer that changes the body of accounting principles used in
preparing its financial statements presented pursuant to Item 8.A.2 of its Form 20-F
(“Item 8.A.2”) to International Financial Reporting Standards (“IFRS”) issued by the
International Accounting Standards Board (“IASB”) may omit the earliest of three years of
audited financial statements required by Item 8.A.2 if the issuer satisfies the conditions set
forth in the related Instruction G. For purposes of this instruction, the term “financial year”
refers to the first financial year beginning on or after January 1 of the same calendar year.’
The accommodation only applies to an issuer that (a) adopts IFRSs for the first time by an
explicit and unreserved statement of compliance with IFRSs as issued by the IASB and (b) the
issuer’s most recent audited financial statements are prepared in accordance with IFRSs.
First-time adopters that rely on the accommodation are allowed, but not required, to
include any financial statements, discussions or other financial information based on
their previous GAAP. If first-time adopters do include such information, they should
prominently disclose cautionary language to avoid inappropriate comparison with
information presented under IFRSs. The SEC did not mandate a specific location for
any previous GAAP information but did prohibit presentation of previous GAAP
information in a side-by-side columnar format with IFRS financial information.
In addition, the accommodation only requires entities to provide selected historical
financial data based on IFRSs for the two most recent financial years instead of the normal
five years. Selected historical financial data based on US GAAP is not required for the five
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