Question

Prepare a one page memo that addresses the concepts, principles, and rules presented in IFRS 1 First-Time Adoption of IFRS. Organize your memo using concepts, principles, and rules as separate sections.

Answer 1

Concept:

A first-time adopter is an entity that, for the first time, makes an explicit and unreserved statement that its general purpose financial statements comply with IFRS.

An entity may be a first-time adopter if, in the preceding year, it prepared IFRS financial statements for internal management use, as long as those IFRS financial statements were not made available to owners or external parties such as investors or creditors. If a set of IFRS financial statements was, for any reason, made available to owners or external parties in the preceding year, then the entity will already be considered to be on IFRSs, and IFRS 1 does not apply

An entity can also be a first-time adopter if, in the preceding year, its financial statements

• asserted compliance with some but not all IFRSs, or
• included only a reconciliation of selected figures from previous GAAP to IFRSs. (Previous GAAP means the GAAP that an entity followed immediately before adopting to IFRSs.)

However, an entity is not a first-time adopter if, in the preceding year, its financial statements asserted:

• Compliance with IFRSs even if the auditor's report contained a qualification with respect to conformity with IFRSs.
• Compliance with both previous GAAP and IFRSs.

An entity that applied IFRSs in a previous reporting period, but whose most recent previous annual financial statements did not contain an explicit and unreserved statement of compliance with IFRSs can choose to:

• apply the requirements of IFRS 1 (including the various permitted exemptions to full retrospective application), or
• retrospectively apply IFRSs in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, as if it never stopped applying IFRSs.

Principles:

IFRS reporting periods

Prepare at least 2014 and 2013 financial statements and the opening balance sheet as of 1 January 2012 or beginning of the first period for which full comparative financial statements are presented, if earlier by applying the IFRSs effective at 31 December 2014.

• Since IAS 1 requires that at least one year of comparative prior period financial information be presented, the opening balance sheet will be 1 January 2012 if not earlier. This would mean that an entity's first financial statements should include at least:
  • three statements of financial position
  • two statements of profit or loss and other comprehensive income
  • two separate statements of profit or loss (if presented)
  • two statements of cash flows
  • two statements of changes in equity, and
  • related notes, including comparative information

If a 31 December 2014 adopter reports selected financial data (but not full financial statements) on an IFRS basis for periods prior to 2013, in addition to full financial statements for 2014 and 2013, that does not change the fact that its opening IFRS balance sheet is as of 1 January 2012.

Rules:

The entity should eliminate previous-GAAP assets and liabilities from the opening balance sheet if they do not qualify for recognition under IFRSs. [IFRS 1.10(b)] For example:

• IAS 38 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 recognised 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 37.10, these are eliminated in the opening IFRS balance sheet.

Recognition of some assets and liabilities not recognised under previous GAAP

Conversely, the entity should recognise all assets and liabilities that are required to be recognised by IFRS even if they were never recognised under previous GAAP. [IFRS 1.10(a)] For example:

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

Reclassification

The entity should reclassify previous-GAAP opening balance sheet items into the appropriate IFRS classification.

• 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 recognised under previous GAAP it would be reversed in the opening IFRS balance sheet.
• 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 underIFRS 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.

Measurement

The general measurement principle – there are several significant exceptions noted below – is to apply effective IFRSs in measuring all recognised assets and liabilities.

How to recognise adjustments required to move from previous GAAP to IFRSs

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

Estimates

In preparing IFRS estimates at the date of transition to IFRSs retrospectively, the entity must use the inputs and assumptions that had been used to determine previous GAAP estimates as of that date (after adjustments to reflect any differences in accounting policies). The entity is not permitted to use information that became available only after the previous GAAP estimates were made except to correct an error.

Changes to disclosures

For many entities, new areas of disclosure will be added that were not requirements under the previous GAAP (perhaps segment information, earnings per share, discontinuing operations, contingencies and fair values of all financial instruments) and disclosures that had been required under previous GAAP will be broadened (perhaps related party disclosures).