CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) 28 January 2015
IFRS 1 - First-time Adoption of International Financial Reporting
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)?
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.
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:
If the entity's previous GAAP had recognized these as assets, they are eliminated in the opening IFRS balance sheet
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:
The entity should reclassify previous-GAAP opening balance sheet items into the appropriate IFRS classification. Examples:
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.
Advice ABC Corp. On the treatment of all the above items under IFRS 1.
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:
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:
(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.)
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:
Optional Exemptions:- IFRS 1 option for retrospective application in relation to the following:
An entity may keep the original previous GAAP accounting that is, not restate:
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.
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.
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.
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.
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.
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.
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.
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
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.
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
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
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.
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
Presentation and disclosure
Certain comparative financial statements are required. The first-time financial statements should include:
Certain reconciliations are required as follows:
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.