IFRS 1 - First Time Adoption of IFRS

Objective

The objective of IFRS 1 is to ensure that an entity's first IFRS financial statements and its first IFRS interim financial statements contain high quality financial information that:

§  is transparent for users and comparable over all periods presentted

§  provides a suitable starting point for accounting under IFRS

§  can be generated at a cost that does not exceed the benefits to users

§  applies to entities preparing their first set of IFRS financial statements by an explicit and unreserved statement of compliance with IFRS

Key Definitions

Reporting date

End of the current reporting period ( e.g. 31/12/2011 for a first time adopter with the year ending 31/12/2011)

Transition date

Beginning of the comparative reporting period (e.g. 1/1/2010 for a first time adopter for the year ending 31/12/2011)

First IFRS reporting period

The reporting period ending on the reporting date of an entity's first IFRS financial statements

Opening IFRS statement of financial position

An entity's statement of financial position (published or unpublished) at the transition date

Key Messages

o  General rule – retrospective application of all IFRS (first time adopter should prepare comparative numbers under IFRS)

o Apply only the applicable version of accounting standards at the reporting date (and not earlier versions at transition date)

o   Opening statement of financial position required under IFRS at transition date

o   Transitional provisions of IFRS 1 to supersede transitional provisions in other IFRS

o   IFRS requires an entity to do the following in the opening IFRS statement of financial position that it prepares as a starting point for its accounting under IFRS

§  Recognize all assets and liabilities whose recognition is required by IFRS

§  Not recognize items as assets or liabilities if IFRS do not permit such recognition

§  Reclassify items that it recognized under previous GAAP (Generally Accepted Accounting Principles) as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under IFRS

§  Apply IFRS in measuring all recognized

o   However, to facilitate the implementation of IFRS, IFRS 1 establishes exceptions which can be broadly dividend in two categories

§  Exemptions (first time adopters can choose to adopt one or more of the exemptions available under IFRS)

§  Prohibitions

first time adopters are prohibited from applying certain provisions of IFRS retrospectively

Exemptions - retrospective application of IFRS

Business Combination - IFRS 3

First time adopter can choose not to restate business combinations (in accordance with IFRS 3) that have occurred before transition date.

However, if an entity chooses to restate one business combination under IFRS 3 prior to transition date, it will need to restate all the business combinations which occur after such restatement, for its opening IFRS statement of financial position.

Carrying value of goodwill at transition date not to be restated except for any intangible assets recognised / derecognised under IFRS 3 criteria.

All other changes resulting from recognition / derecognition to be reported in retained earnings.

Fair value or revaluation as deemed cost (IAS 16 / IAS 40)

For certain categories of assets, entity can choose the carrying values under the previous GAAP or fair value at transition date as deemed cost under IFRS.

Categories of assets falling under this exemption comprise:

§  Property, plant and equipment

§  Investment property

§  Intangible assets (subject to strict recognition criteria specified in IAS 38)

Employee benefits (IAS 19)

First time adopter can elect to recognise all cumulative actuarial gains and losses at transition date, even if it uses the corridor approach for later actuarial gains and losses.

Cumulative translation difference (IAS 21)

A first time adopter can adopt to:

§  Set its cumulative translation differences for all foreign operations as zero at translation date, and

§  Exclude translation differences that arose before the translation date from gain or loss calculations on subsequent disposal of any foreign operation

Assets and liabilities of subsidiaries, associates and joint ventures

If a subsidiary becomes a first time adopter later than its parent, then its assets and liabilities can be measured (in subsidiary's own financial statements) at either:

§  Fair values determined at parent's transition date; or

§  At subsidiary's own transition date under requirements of IFRS 1

If a subsidiary becomes a first time adopter earlier than its parent, then its assets and liabilities shall be measured (for consolidation purposes) at the carrying amounts in the subsidiaries' financial statements.

Borrowing costs (IAS 23)

A first time adopter can apply the transitional provisions set out in IAS 23 Borrowing Costs

Prohibitions - retrospective application of IFRS

Financial Instruments (IAS 39)

§  Hedge accounting

§  All derivatives to be measured at fair value at transition date

§  All deferred gains and losses arising on derivatives under previous GAAP to be eliminated on transition date

§  Opening statement of financial position not to reflect a hedging relationship that does not qualify specified criteria under IAS 39 at transition date

§  Transaction entered before the transition date not to be retrospectively designed as hedges

Estimates

§  Estimates made under previous GAAP at the transition date to be consistent with IFRS, except where there is an error

§  Information in respect of any estimate received after the transition date to be treated as non-adjusting subsequent event, except where there is an error

§  New estimates required for IFRS transition to be reflective of conditions at the transition date

Non-controlling interest

Certain requirements of IAS 27 around disclosure in the financial statements regarding non-controlling interest to be applied prospectively

Disclosure requirements

First set of IFRS financial statements to include:

§  At least three statements of financial position

§  Two statements of comprehensive income

§  Two separate income statements (if presented)

§  Two statements of changes in equity

§  Related notes, including comparative information

Non-IFRS comparative IFRS information and historical summaries are not required to be compliant with IFRS provided

§  These are prominently labeled as such; and

§  The entity discloses the nature (and not value) of main adjustments required to make it comply with IFRS

§  An entity shall explain how transition from previous GAAP to IFRS affected its financial position, performance and cash flows

Reconciliations of its equity reported under previous GAAP to its equity under IFRS at:

§  The date of transition to IFRS: and

§  The end of the latest period presented in the entity’s most recent annual financial statements under previous GAAP

A reconciliation of its total comprehensive income under IFRS for the latest period in the entity’s most recent annual financial statements to its total comprehensive income, or if not available, to its profit or lost under previous GAAP for the same period

Disclosures under IAS 36 around impairment is recognized or reversed for opening statement of financial position

An explanation of the material adjustments to the cash flow statement, if it presented one under its previous GAAP

Interim financial statements

If an entity adopting IFRS is required to prepare interim financial reports (either on a voluntary basis or if required to do so by a regulator), it is mandatory to comply with the requirements of IAS 34

If the entity prepares interim financial reports under IAS 34, these should include reconciliations of:

§  Its equity under previous GAAP at the end of that comparable interim period to its equity under IFRS at that date;

§  Its comprehensive income under IFRS fro that comparable interim period to comprehensive income, or if not available,  profit or loss under previous GAAP, both on current and year-to-date basis; and

§  Reconciliations to explain how the transition from previous GAAP to IFRS affected its financial position, performance and cash flows

First time adopters should not apply the requirements of IAS 8 relating to the disclosure of changes in accounting policies.

In all reconciliations, entity should distinguish errors, if any, under previous GAAP from accounting policy changes.