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Ifrs 1 - first-time adoption of international financial repo


CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. )     28 January 2015

CA. Amit Daga
Finance Controller CA. CS. CFA. CIFRS. M.COM.  
 416 likes  8997 points

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IFRS 1 - First-time Adoption of International Financial Reporting

 

  • IFRS 1 applies to first-time adoptions of IFRS.  A first-time adoption is the year in which the entity first files financial statements that contain an explicit statement that the financial statements comply with IFRS.

 

  • The general rule is that the assets, liabilities and equity reported on the opening statement of financial position should be measured using retrospective application of the relevant IFRS standards.  There are some exceptions, both mandatory and voluntary, to this general rule.

 

  • To the extent that the assets, liabilities and equity of the opening statement of financial position measured under IFRS differ from those measured on the same date under the entity’s previous GAAP, the adjustments should be recognized directly in retained earnings.

 

  • There are various presentation and disclosure requirements, including the presentation of comparative information and a reconciliation of comprehensive income and equity from previous GAAP to IFRS.

 

Case Study 1: - Difference in measurement of assets, liabilities and equity

 

Beach Bums is a US GAAP reporter that accounts for its inventory using the last-in, first-out (LIFO) method. On December 1, 2011, Beach Bums purchased 100 units of finished goods inventory at $1.00 per unit. On December 15, 2011, it purchased an additional 100 units of finished goods inventory at $1.20 per unit. Beach Bums accounts for its inventory using the LIFO cost formula and uses the specific-identification method for purposes of determining LIFO cost. On December 21, 2011, Beach Bums sold 60 units and recorded a debit to cost of goods sold and a credit to inventory of $72 (60 units x $1.20 per unit).  The ending LIFO inventory balance in Beach Bums’ consolidated US GAAP financial statements as of January 1, 2012, was $148 [(100 units x $1.00 per unit) + (40 units x $1.20 per unit)].

 

Beach Bums will become a first-time adopter and will present its first IFRS financial statements as of and for the year ending December 31, 2014. 

Since LIFO is not allowed under IFRS, Beach Bums decides to use the FIFO method to value inventory.

 

At what amount will Beach Bums report inventory on the opening statement of financial position? What is the necessary journal entry (ignoring any related tax impact)?

 

Solution

 

Beach Bums must restate its carrying amount of the inventory in the opening IFRS statement of financial position as of January 1, 2012, to its FIFO cost or $160 [(40 units x $1.00 per unit) +     (100 units x $1.20 per unit)]. The difference between the LIFO and FIFO ending inventory balances of $12 ($148 - $160) would be recorded as an adjustment to retained earnings (before any adjustment for income taxes).

 

Thus, the journal entry would be as follows:

Inventory (LIFO reserve)       $12

                        Retained earnings                   $12

 

 

 

 

Adjustments required to move from previous GAAP to IFRSs at the time of first-time adoption.

 

  1. De-recognition of some assets and liabilities not recognized under previous GAAP

The entity should eliminate previous-GAAP assets and liabilities from the opening balance sheet if they do not qualify for recognition under IFRSs. For example:

  • IAS 38 (Intangible Assets) does not permit recognition of expenditure on any of the following as an intangible asset:
    • research
    • start-up, pre-operating, and pre-opening costs
    • training
    • advertising and promotion
    • moving and relocation

If the entity's previous GAAP had recognized 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, these are eliminated in the opening IFRS balance sheet

 

  1. Recognition of some assets and liabilities not recognized under previous GAAP

Conversely, the entity should recognize all assets and liabilities that are required to be recognized by IFRS even if they were never recognized under previous GAAP. For example:

  • IAS 39 requires recognition of all derivative financial assets and liabilities, including embedded derivatives. These were not recognized under many local GAAPs.
  • IAS 19 requires an employer to recognize 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 (e.g., 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 recognized in conformity with IAS 12.

 

  1. Reclassification

The entity should reclassify previous-GAAP opening balance sheet items into the appropriate IFRS classification. 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 recognized under previous GAAP it would be reversed in the opening BS.
  • 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.
  • 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.

 

Adjustments required to move from previous GAAP to IFRSs at the date of transition should be recognized directly in retained earnings or, if appropriate, another category of equity at the date of transition to IFRSs.

 

Case Study 2: - Difference in measurement of assets, liabilities and equity

 

ABC Corp. presented its financial statements under the national GAAP. It needs to adopted IFRS from 2011 and is required to prepare an opening IFRS balance sheet as at Apr1, 2010. In preparing the IFRS op. balance sheet ABC Corp. noted.

  • Under its previous GAAP, ABC Corp. had deferred advertising costs of Rs.100 and had classified proposed dividends of Rs.50 as a current liability.
  • It had not made a provision for warranty of Rs.20 in the financial statements presented under previous GAAP since the concept of “constructive obligation” was not recognized under its previous GAAP.
  •  In arriving at the amount to be capitalized as part of costs necessary to bring an asset to its working condition, ABC Corp. had not included professional fees of Rs.30 paid to architects at the time when the building it currently occupies as its head office was being constructed.

Advice ABC Corp. On the treatment of all the above items under IFRS 1.

 

Solution

 

In order to prepare the opening IFRS balance sheet at April 1, 2010, ABC Corp. would need to make these adjustments to its balance sheet at March 31, 2010, presented under its previous GAAP:

  • IAS 38 does not allow advertising costs to be deferred whereas ABC Corp.’s previous GAAP allowed this treatment. Thus, Rs.100 of such deferred costs should be derecognized (expensed) under IFRS.
  • IAS 37 requires recognition of a provision for warranty but ABC Corp. previous GAAP did not allow a similar treatment. Thus, a provision for warranty of Rs.20 should be recognized under IFRS.
  • IAS 10 does not allow proposed dividends to be recognized as a liability; instead, under the latest revision to IAS 10, they should be disclosed in footnotes. ABC Corp.’s previous GAAP allowed proposed dividends to be treated as a current liability. Therefore, proposed dividends of Rs.50 should be disclosed in footnotes.
  • IAS 16 requires all directly attributable costs of bringing an asset to its working condition for its intended use to be capitalized as part of the carrying cost of PPE. Thus Rs.30 of architects’ fees should be capitalized.

 

  1. 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:

  • Reconciliations of equity reported under previous GAAP to equity under IFRS both

(a) At the date of transition to IFRSs 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 Dec 2014 financial statements, the reconciliations would be as of 1 January 2012 and 31 December 2013.)

  • 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.
  • explanation of material adjustments that were made, in adopting IFRSs for the first time, to the statement of financial position, statement of comprehensive income and statement of cash flows (the latter if presented under previous GAAP)
  • if errors in previous GAAP financial statements were discovered in the course of transition to IFRSs, those must be separately disclosed
  • if the entity recognized or reversed any impairment losses in preparing its opening IFRS balance sheet, these must be disclosed
  • 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

 

  1. 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 2014, certain disclosure are required in its interim financial statements prior to the 31 December 2014 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.

 

       Mandatory Exemptions: - IFRS 1 prohibits retrospective application in relation to the following:

 

  1. Hedge accounting:
  • At the date of adoption of IFRS an entity should fair value all derivatives and eliminate all deferred gains and losses.
  • If the entity has a net position that it had designated as a hedge in accordance with previous GAAP, then it can continue to designate individual items within that net position as hedged items.

 

  1. Non-controlling interests: 
  • Various requirements related to the accounting for non-controlling interests are to be applied prospectively, including the attribution of total comprehensive income to the owners of the parent and non-controlling interests and the accounting for changes in parent ownership.

 

  1. Derecognition of financial assets and financial liabilities:
  • In general, if the entity derecognized a financial asset or liability as a result of a transaction that occurred before the date of transition to IFRS, they will not recognize these items under IFRS

 

  1. Estimates:
  • Estimates should be made on the date of transition to IFRS to be consistent with estimates according to previous GAAP, with adjustments made to reflect any differences in accounting policies, unless there is objective evidence the estimates were in error.

 

 

 

Optional Exemptions:- IFRS 1 option for retrospective application in relation to the following:

 

  1. Business combinations that occurred before opening balance sheet date

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 recognized 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, interests in joint ventures and interests in a joint operation when the operation constitutes a business.

 

  1. 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 date of transition to IFRSs. 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.

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.

This option applies to intangible assets only if an active market exists.

 

  1. Employee benefits: actuarial gains and losses

Under IAS 19, an entity may have unrecognized actuarial gains or losses in case it uses the corridor approach. Retrospective application of this approach would necessitate splitting the cumulative gains and losses, from inception of the plan until the date of transition, into a recognized and an unrecognized portion.

IFRS 1 allows a first-time adopter to elect to recognize all cumulative actuarial gains and losses at the date of transition to IFRS, even if it uses the corridor approach for subsequent actuarial gains or losses. IFRS 1 does, however, mandate that if an election is made for one employee benefit plan, it should apply to all plan.

 

  1. Cumulative translation differences

An entity may elect to recognize 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.

 

  1. Compound financial instruments

A compound financial instrument is one which has attributes of both a liability and equity. International standards require that the two elements are separated; the exemption does not require the separation where the liability element is no longer outstanding.

 

  1. Investments in subsidiaries, jointly controlled entities and associates

The entity can choose to measure investments reported on separate financial statements at deemed cost.  Deemed cost is either the fair value at the date of transition to IFRS or the previous GAAP carrying amount at the date of transition.

 

 

 

  1. Assets And Liabilities Of Subsidiaries, Associates, And Joint ventures

If a subsidiary becomes a first-time adopter after its parent, then the assets and liabilities of the subsidiary should be measured at either the carrying amounts that would be included in the parent’s financial statements, based on the parent’s date of transition, or the carrying amounts that would be required based on the subsidiary’s date of transition. 

If a parent becomes a first-time adopter after its subsidiary, then the parent should measure the assets and liabilities of the subsidiary in the consolidated statements at the same carrying amounts as in the financial statements of the subsidiary, after adjusting for consolidation and equity accounting adjustments, as well as the effects of the business combinations in which the parent acquired the subsidiary.

 

  1. Determining whether an arrangement contains a lease

IFRIC-4 requires and assessment of, whether a contract or arrangement contains a lease. The assessment should be carried out at the inception of the contract or arrangement. First time adopters must apply IFRIC 4, but can elect to make this assessment as of the date of transition based on the facts at that date, rather than inception of the arrangement

 

  1. Decommissioning liabilities included in PPE

IAS 16, the cost of an item of PPE includes “the initial estimate of the costs of dismantling and removing the item and restoring the site on which it’s located. For a first time adopter, retrospective application of these requirements would require an entity to construct historical records of all such adjustments that would have made in the past, which in many cases, will not be practicable. Therefore, under this option exemption an entity may elect.

 

  1. Fair value measurement of financial assets and liabilities.

In case the functional currency is INR, then revenue contracts denominated in USD would amount to an embedded derivative and would need to be recorded and fair valued at the date of transition to IFRS

 

  1. Share based payment

IFRS only asks for fair value method to be followed. Intrinsic method can be exempted for first year financial statements including the opening statement of financial position

 

  1. Severe hyperinflation:

An exemption applies to an entity that was subject to severe hyperinflation and has previously applied IFRS or is adopting IFRS for the first time. This exemption allows an entity to measure at fair value certain assets and liabilities and to use this fair value as deemed cost in the opening statement of financial position.

 

  1. Designation of previously recognized financial instruments:  

An entity may elect the fair value option for financial assets and liabilities as of the transition date to IFRS as long as the instruments meet the criteria for the fair value option

 

  1. Insurance contracts

 

  1. Borrowing Costs

 

  1. Transfers of assets from customers accounted for in accordance with IFRIC 18

 

  1. Extinguishing financial liabilities with equity instruments in accordance with IFRIC 19

 

  1. Stripping costs in the production phase of a surface mine in accordance with IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine.

 

Presentation and disclosure

Certain comparative financial statements are required.  The first-time financial statements should include:

  • 3 statements of financial position.
  • 2 statements of comprehensive income and two statements of net income, if presented separately.
  • 2 statements of cash flows.
  • 2 statements of changes in equity.
  • Related notes.

Certain reconciliations are required as follows:

  • A reconciliation of equity from the amount reported under the previous GAAP to the amount reported under IFRS.  This reconciliation is required at both the date of transition to IFRS as well as the end of the latest annual period that was presented under the previous GAAP.
  • A reconciliation of comprehensive income from the amount reported under the previous GAAP to the amount reported under IFRS.  This reconciliation is required for the latest annual period that was presented under the previous GAAP.

 

The entity must provide a discussion of the effect of the transition from the previous GAAP to IFRS on its reported financial position, financial performance and cash flows.

If an entity provides historical summaries of selected data for periods that precede the first period that they present comparative information under IFRS, then these summaries do not need to be presented under IFRS.  However, the entity must clearly label these summaries as non-IFRS.  The entity must also disclose the nature, but not a quantitative assessment, of the adjustments that would make these numbers comply with IFRS.

All disclosures that are required under all other IFRS standards are required in the first-time IFRS statements.

 

 

 

 

 




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