In: Finance
• Discuss the features that all financial statements prepared under IFRS 1 must possess.
IFRS 1 describes the procedures to follow for first-time adopters of International Financial Reporting Standards in preparing Financial Statements. The company adopting IFRS 1 should prepare a complete set of financial statements for the first IFRS reporting period and the preceding. In practical terms, if the company adopts IFRS 1 for the year ended 31st December 2019, it must apply IFRS 1 retrospectively to the 2019 and 2018 reporting periods, and to the opening statement of financial position on 1st January 2018.
The company should use the same accounting principles throughout all periods which are presented in its first IFRS Financial Statements. IFRS 1 provides certain exemptions (16 in total) in some areas from reinstating prior years transactions where the cost of complying with them would be likely to exceed the benefits to users of financial statements. It also prohibits retrospective application in areas where management judgment is required. For companies, transitioning from US GAAP to IFRS 1, it is mandatory to report the effect of these changes on the financial position, financial performance and cash flows.
The company can apply IFRS 1 in its first IFRS financial statements only. After that, there are other versions of IFRS which would be applied.
Some of the important features of IFRS 1 for financial statements are:-
1. An opening IFRS statement of the financial statement is prepared at the date of transition. The date of transition is the beginning of the first period for which an entity prepares information using IFRS standard.
2. In its first IFRS financial statements, the company applies the version of IFRS effective at the end of its first IFRS reporting period.
3. The company classified assets and liabilities according to IFRS 1 classification and declassify assets and liabilities that do not qualify for recognition under IFRS 1.
4. Any adjustment resulting from the application of IFRS to the opening statement of financial position is recognized in retained earnings at the transition date on the balance sheet.
5. With limited exceptions, estimates in accordance with IFRSs at the date of transition must be consistent with estimates made for the same date under previous GAAP.
6. Company's first IFRS financial statements should consist of at least three statements of financial position (balance sheet), two statements of comprehensive income, two-income statements, two statements of cash flows and two statements of changes in equity. All of these statements must comply with the IFRS standard.
7. Companies can present historical summaries of certain data prior to the transition period, as long as the information is labeled as not being prepared in accordance with IFRS. If data is presented such a way, then the company should also explain the nature of adjustments to be done to make it compliant with IFRS.
8. In particular, a first-time adopter is required to provide reconciliations between amounts reported under previous GAAP and the equivalent measures under IFRSs. These reconciliations must clearly identify the correction of any errors in relation to an entity’s previous GAAP financial statements.
9. There are 4 mandatory exceptions ( Accounting estimates, Hedge accounting, Derecognition of financial assets and financial liabilities and Non-controlling interests) and 16 option exemptions (Leases, Employee benefits, Fair value measurement, and others).
Thus overall IFRS 1 provides the procedures to prepare financial statements IFRS compliant and making adjustments to the prior used standards such as US GAAP.