most recent financial years. Although the SEC does not prohibit entities from including
selected financial data based on previous GAAP in their annual reports, side-by-side
presentation of data prepared under IFRSs and data prepared under previous GAAP is
prohibited. In addition, inclusion of previous GAAP selected financial data will trigger the
requirement for the corresponding reconciled US GAAP selected financial data.10
Where a narrative discussion of its financial condition is provided, the accommodation
requires management to focus on the financial statements prepared under IFRSs as
issued by the IASB for the past two financial years.
IFRS 1 requires a first-time adopter to present reconciliations from its previous GAAP
to IFRSs in the notes to its financial statements and allows certain exceptions from full
retrospective application of IFRSs in deriving the relevant data. Under the SEC’s
accommodation, any issuer relying on any of the elective or mandatory exceptions from
IFRSs that are contained within IFRS 1 will have to disclose additional information
which includes:
• to the extent the primary financial statements reflect the use of exceptions
permitted or required by IFRS 1:
• detailed information for each exception used, including:
• an indication of the items or class of items to which the exception was
applied; and
• a description of what accounting principle was used and how it was
applied; and
• where material, qualitative disclosure of the impact on financial condition,
changes in financial condition and results of operations that the treatment
specified by IFRSs would have had absent the election to rely on the exception.
First-time
adoption
351
8.1.2 IPTF
guidance
In November 2008, the Center for Audit Quality SEC Regulations Committee’s
International Practices Task Force (‘IPTF’) provided guidance as to the reconciliation
requirements of an SEC foreign private issuer the first time it presents IFRS financial
statements in its Form 20-F, when that issuer previously used US GAAP for its primary
financial statements filed with the SEC.11 Among others, the IPTF guidance addresses
the concern that the reconciliations called for by IFRS 1, which are prepared using the
issuer’s local GAAP rather than US GAAP, would not have sufficient information to help
US investors to bridge from the prior US GAAP financial statements filed with the SEC
to IFRSs. Accordingly, the IPTF guidance requires additional detailed reconciliations in
these circumstances from US GAAP to IFRSs either in a one step or a two-step format
(see below).
The reconciliation requirements for each of the scenarios are described below:
• SEC Foreign Private Issuers who currently report under their local GAAP and
provide a reconciliation from their local GAAP to US GAAP – In the year of
adoption of IFRSs, these entities will be allowed to file two years rather than three
years of profit or loss statements, shareholders’ equity and cash flows prepared in
accordance with IFRSs. As part of the IFRS transition, these entities will provide
the disclosures and reconciliations required under IFRS 1 including:
• an equity reconciliation as at the date of the transition and as at the
comparative year-end;
• a comprehensive income (or statement of profit or loss, if presented)
reconciliation for the comparative year; and
• an explanation of material adjustments to the statement of cash flows for the
comparative year.
If the IFRS 1 disclosures and reconciliations are prepared using the local GAAP as
the issuer’s previous GAAP rather than US GAAP, no additional US GAAP to IFRSs
or US GAAP to local GAAP reconciliations will be required.
• SEC foreign private issuers that currently report under US GAAP only – Some SEC
foreign private issuers currently use US GAAP as their primary GAAP in both their
home jurisdiction and the United States without reconciliation. These registrants
would also be eligible to file two years rather than three years of statements of
profit or loss and other comprehensive income, shareholders’ equity and cash
flows in their first set of IFRS financial statements. In the year of adoption of IFRSs,
these entities will be required to provide the IFRS 1 disclosures and reconciliations
described above. Such disclosures will be prepared using US GAAP as the issuer’s
previous GAAP.
• SEC foreign private issuers that currently report under local GAAP for local
reporting and under US GAAP in their SEC Form 20-F filings (assuming these
issuers adopt IFRSs in the current period for both local and SEC reporting
purposes) – These registrants would also be eligible to file two years rather than
three years of statements of profit or loss and other comprehensive income,
shareholders’ equity and cash flows in their first set of IFRS financial statements.
Under IFRS 1, such entities might conclude their local GAAP is their previous
352 Chapter
5
GAAP and their IFRS 1 disclosures and reconciliations would be prepared on that
basis. As no reconciliation from their local GAAP to US GAAP was previously
provided, the SEC will require additional disclosure in the Form 20-F to enable
investors to understand material reconciling items between US GAAP and IFRSs
in the year of adoption. Two possible forms of disclosure are acceptable:
• One-Step Format – Registrants can provide an analysis of the differences
between US GAAP and IFRSs in a tabular format (consistent with Item 17 of
Form 20-F) for the same time period and dates that the IFRS 1 reconciliations
are required. The registrant must provide this disclosure for equity as at the
beginning and end of the most recent comparative period to the year of adoption
and of comprehensive income (or profit or loss) for the most recent comparative
year. A description of the differences between US GAAP and IFRSs for the
statement of cash flows is not necessary because registrants are not required to
reconcile IAS 7 statement of cash flows to those prepared under US GAAP.
• Two-Step Format – Registrants can choose to disclose a two-step
reconciliation which would include a quantitative analysis of the
differences between US GAAP and their local GAAP and between their
local GAAP to IFRSs. The registrant must provide these reconciliations for
equity as of the beginning and end of the most recent comparative period
to the year of adoption of IFRSs and for comprehensive income (or profit
or loss) for the most recent comparative year. Registrants will also be
required to provide an explanation of the material differences between
the statement of cash flows under US GAAP and the statement of cash
flows under their local GAAP for the most recent comparative period to
the year of adoption of IFRSs.
• SEC foreign private issuers that currently report under IFRSs for local reporting and
under US GAAP in their SEC Form 20-F filings (assuming these issuers adopted IFRSs
for local reporting in a period that preceded the earliest period for which audited
financi
al statements are required in their SEC filing) – These registrants would not be
eligible to file two years of statements of profit or loss and other comprehensive
income, shareholders’ equity and cash flows the first time they file IFRS financial
statements with the SEC, since they are not first-time adopters of IFRSs. Rather, they
are required to present a complete set of IFRS financial statements for all periods
required by the Form 20-F. In addition, these issuers will be required to present a
reconciliation that enables US investors to bridge their previous US GAAP to IFRSs.
Such a reconciliation will be similar to the One-Step Format described above, except
that the periods presented will be for equity as of the most recent comparative period
presented and for comprehensive income (or profit or loss) for the two most recent
comparative periods. However, if the issuers are required to present a statement of
financial position as of the end of the earliest comparative period, the reconciliation
will also be required of the equity as of the end of that period.
First-time
adoption
353
8.2
Disclosure of IFRS information in financial statements for
periods prior to an entity’s first IFRS reporting period
8.2.1 IFRS
guidance
Although IFRS 1 provides detailed rules on disclosures to be made in an entity’s first
IFRS financial statements and in interim reports covering part of its first IFRS reporting
period, it does not provide any guidance on presenting a reconciliation to IFRSs in
financial reports before the start of the first IFRS reporting period. An entity wishing to
disclose information on the impact of IFRSs in its last financial statements under its
previous GAAP cannot claim that such information is prepared and presented in
accordance with IFRSs because it does not disclose all information required in full IFRS
financial statements and it does not disclose comparative information.
As the extract below illustrates, in practice, some entities get around this problem by
disclosing pro forma IFRS information and stating that the pro forma information does
not comply with IFRSs.
Extract 5.17: ARINSO International SA (2003)
2003 IFRS Consolidated Financial Information [extract]
1. OPENING BALANCE AT JANUARY 1, 2003 [extract]
In 2003, ARINSO decided to anticipate the adoption of the International Financial Reporting Standards (earlier
called International Accounting Standards (IAS)). These standards will become mandatory in 2005 for the
consolidated financial statements of all companies listed on stock exchanges within the European Union.
As of 2004 ARINSO will publish quarterly reports in full compliance with IFRS. In order to have comparable
figures as requested by IFRS, the 2003 financial statements were already prepared on an IFRS basis. In 2003, the
impact of the IFRS conversion on the quarterly figures was published in our press releases.
The main differences between Belgian Generally Accepted Accounting Principles (GAAP) and IFRS as well as a
reconciliation of the equity to IFRS at the date of conversion are presented hereunder.
3. IFRS VALUATION RULES [extract]
3.2 Adoption of the IFRS
The IFRS standards will be adopted for the first time in the consolidated financial statements for the year ended
December 31, 2004. The standard for the first time application of the IFRS, published by the IASB in June 2003,
was utilized in the pro forma consolidated IFRS balance sheet, income statement and cash flow statement published
for the year ended December 31, 2003.
The information related to accounting year 2003 was converted from Belgian GAAP to IFRS in view of the
comparison of information next year. The 2004 annual report will include all necessary comparable information.
Free translation of the Statutory Auditor’s Report submitted to the shareholders, originally prepared in Dutch, on
the restatement of the consolidated balance sheet, the profit and loss account and cash flow statement from
accounting principles generally accepted in Belgium into IFRS [extract]
The financial statements provided, which do not include all notes to the financial statements in accordance with
IFRS, have been prepared under the responsibility of the company’s management, and do not comply with IFRS.
354 Chapter
5
8.2.2
Disclosure of expected changes in accounting policies
In certain countries, publicly listed companies are required by regulation to disclose the
potential impact that recently issued accounting standards will have on their financial
statements when such standards are adopted in the future. The Canadian Securities
Administrators (the CSA) in their Management’s Discussion & Analysis (MD&A form)12
require this disclosure for changes in accounting policies that registrants expect to make
in the future. In connection with the transition to IFRSs, the CSA issued a Staff Notice13
clarifying that ‘changes in an issuer’s accounting policies that an issuer expects to make
on changeover to IFRSs are changes due to new accounting standards and therefore fall
within the scope of the MD&A form.’ Among other matters, the CSA Staff Notice
requires certain disclosures of companies that have developed an IFRS changeover
plan, in interim and annual MD&A forms starting three years before the first IFRS
financial statement date, including the following:
• accounting policies, including choices among policies permitted under IFRSs, and
implementation decisions such as whether certain changes will be applied on a
retrospective or a prospective basis;
• impact on information technology and data systems;
• changes to internal control over financial reporting;
• impact on disclosure controls and procedures, including investor relations and
external communications plan;
• enhancements to financial reporting expertise, including training requirements; and
• changes in business activities, such as foreign currency and hedging activities, as
well as matters that may be influenced by GAAP measures such as debt covenants,
capital requirements and compensation arrangements.
The CSA Staff Notice also specified requirements for update for periods up to the year
of changeover, including discussion of the impact of transition for issuers that are well
advanced in their plans.
An entity that is planning to adopt IFRS should take note of the regulatory requirements
in its jurisdiction or the exchange where it is listed to determine the form of
communication that is required in advance of publishing its first IFRS financial statements.
First-time
adoption
355
References
1 Regulation (EC) No 1606/2002 of the European
6
Annual Improvements to IFRSs
2009-2011
Parliament and of the Council of 19 July 2002 on
Cycle, IASB, May 2012.
the application of international accounting 7
IFRIC Update, October 2004, p.3.
standards, article 4 defines these companies as
8 Release No. 33-8567, First-Time Application of
follows: ‘For each financial year starting on or after
International Financial Reporting Standards,
1 January 2005, companies governed by the law of
Securities and Exchange Commission (SEC),
a Member State shall prepare their consolidated
12 April 2005.
accounts in conformity with the international 9
Release
No.
33-8879,
Acceptance from Foreign
accounting standards adopted in accordance with
Private Issuers of Financial Statements
the procedure laid down in Article 6(2) if, at their
Prepared in Accordance with International
balance sheet date, their securities are admitted to
Financial Reporting Standards without
trading on a regulated market of any Member State
Reconciliation to U.S. GAAP, Securities and
within the meaning of Article 1(13) of Council
Exchange Commission, 4 March 2008.
Directive 93/22/EEC of 10
May 1993 on 10 24 November 2009 IPTF meeting minutes.
investment services in the securities field.’
11 25 November 2008 IPTF meeting minutes.
2
International Practices Task Force – 12
Canadian Securities Administration Form
November 25, 2008 – Highlights, Center for
51-102F1, Management’s Discussion and
Audit Quality Washington Office,
Analysis.
25 November 2008.
13 Canadian CSA Staff Notice 52-320 – Disclosure
3
IFRIC Update, October 2004.
of Expected Changes in Accounting Policies
4
IASB Update, October 2005.
Relating to Changeover to International Financial
5
Amendments to IFRS
10, IFRS
11 and
Reporting Standards, May 9, 2008.
IFRS 12, June 2012.
356 Chapter
5
357
Chapter 6
Consolidated
financial statements
1 INTRODUCTION ............................................................................................ 363
1.1
Background ............................................................................................................363
1.2 Development
of IFRS 10 .................................................................................... 364
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 71