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When is IFRS 1 applied?
An entity applies IFRS 1 when preparing its
first "IFRS financial statements"
for a period beginning on or after 1 January
2004 [IFRS1.45]. Early application is encouraged,
in which case the financial statements should
disclose that IFRS 1 has been applied instead
of SIC-8 [IFRS1.47] .
The first IFRS financial statements are the
first annual financial statements to contain
an "explicit and unreserved statement of
compliance with IFRS" [IFRS1.3] .
What is the opening IFRS balance sheet?
The opening IFRS balance sheet is the starting
point for all subsequent accounting under IFRS.
Entities should prepare an opening IFRS balance
sheet at "the date of transition to IFRS".
This is the beginning of the earliest period
for which full comparative information is presented
in accordance with IFRS [IFRS1.AppendixA] .
The opening IFRS balance sheet:
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includes all the assets and liabilities
that IFRS require [IFRS1.10(a)] ; |
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excludes any assets and liabilities
that IFRS do not permit [IFRS1.10(b)] ; |
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classifies all assets, liabilities
and equity in accordance with IFRS [IFRS1.10(c)] ; and |
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measures all items in accordance
with IFRS [IFRS1.10(d)] . |
Entities can choose to apply one or more of the fifteen optional exemptions to reduce the burden of complying with IFRS (see below) [IFRS1.13]. There are also four mandatory exceptions to the general principle of full retrospective application that should be applied (see below) [IFRS1.26]
The adjustments made as a result of applying IFRS
for the first time are recorded in retained
earnings or another equity category at the date of transition to IFRS [IFRS1.11]
. The requirement to measure
assets and liabilities in accordance with IFRS
includes application of IFRS requirements relating
to impairment and the translation of foreign
currencies.
The opening balance sheet need not be presented
in the first IFRS financial statements [IFRS1.6]
.
What accounting policies are applied in the first IFRS financial statements?
The first IFRS financial statements are prepared
using accounting policies that comply with the
standards in force at the "reporting date"
[IFRS1.7]. This is the closing balance sheet
date for the first IFRS financial statements
. These polices are applied retrospectively
to the opening IFRS balance sheet and all of
the periods presented in the first IFRS financial
statements. Successive versions of the same
standard are not applied in different periods
[IFRS1.8] .
The transition guidance in individual standards,
and the guidance in IAS 8 for changes in accounting
policies, apply to existing IFRS users, and
are not applied by first-time adopters [IFRS1.9,
42] . Specific guidance for first-time
adopters is provided in all new IFRS issued
after the issue of IFRS 1.
Certain exemptions refer to the entity's date
of adoption. This is the beginning of the reporting
period for which IFRS financial statements are
first prepared. An entity that prepares its
first IFRS financial statements for the year
ended 31 March 2006 will therefore have a date
of adoption of 1 April 2005.
What are the optional exemptions from retrospective application?
There are fifteen optional exemptions from full
retrospective application of IFRS. First-time
adopters can elect to apply all, some or none
of the exemptions.
Business combinations
An entity is not required to restate business
combinations that were recognised before the
date of the transition to IFRS. Management can
elect to restate a previous business combination,
but if it does so it must also restate all later
business combinations [IFRS1.AppendixB1] . An entity
that elects to restate a business combination
that was recognised before the date of transition
to IFRS must apply the IFRS business combinations
guidance in force at the reporting date . All first-time adopters with a reporting
date of 31 March 2004 or later must therefore
apply IFRS 3 to any business combinations before
transition date that they choose to restate
.
When the exemption is applied:
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the classification of the combination
as an acquisition or a uniting of interests
does not change [IFRS1.AppendixB2(a)] ; |
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the assets and liabilities acquired
or assumed in the business combination are
recognised in the acquirer's opening IFRS
balance sheet unless IFRS does not permit
recognition [IFRS1.AppendixB2(b),(c)] ; |
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the deemed cost of assets and liabilities
acquired or assumed is the carrying value
immediately after the business combination
[IFRS1.AppendixB2(e)] ; and |
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assets and liabilities that are
measured subsequently at fair value under
IFRS are restated to fair value on the opening
IFRS balance sheet [IFRS1.AppendixB2(d)] . |
Assets and liabilities that were not recognised
under an entity's previous GAAP immediately
after the business combination are recognised
on the opening IFRS balance sheet only if they
would be recognised in the acquired entity's
separate IFRS balance sheet [IFRS1.B2(f)] .
The carrying value of goodwill under an entity's
previous GAAP at transition date is adjusted
for any:
| a) |
intangible assets that are recognised
for the first time in accordance with IFRS
; |
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| b) |
intangible assets that were recognised
under an entity's previous GAAP, but do
not satisfy the IFRS recognition criteria
; and |
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| c) |
adjustments to contingent consideration
required by IFRS [IFRS1.AppendixB2(g)] . |
Adjustments to deferred tax and minority interests
in respect of a) and b) above are adjusted against
goodwill [IFRS1.AppendixB2(g)].
Entities are required to test the carrying
value of goodwill for impairment using the guidance
in IAS 36 at the date of transition to IFRS,
regardless of whether there is any indication
that the goodwill is impaired [IFRS1.AppendixB2(g)].
Goodwill amortisation under previous GAAP is
not reversed . Goodwill is not
adjusted to reclassify any intangible assets
subsumed within goodwill under previous GAAP,
unless those intangible assets qualify for recognition
on the acquired entity's separate IFRS balance
sheet .
IFRS 1 does not deal specifically with negative
goodwill. Any negative goodwill recognised under
previous GAAP is adjusted against opening retained
earnings on the opening IFRS balance sheet,
after making the adjustments described above.
Adjustments to goodwill in respect of contingent consideration
as required by IFRS 1 Appendix B2(g) are made against
retained earnings when there is no existing
goodwill, rather than create or increase negative
goodwill.
Goodwill written off directly to equity under
previous GAAP is not reinstated on transition
to IFRS [IFRS1.AppendixB2(i)] .
The business combinations exemption is available
to all transactions that meet the IFRS definition
of a business combination. The classification
under previous GAAP is not relevant for determining
whether or not the exemption can be applied
.
The business combinations exemption is applied
consistently to the acquisition of subsidiaries,
associates and interests in joint ventures [IFRS1.AppendixB3].
This includes consistent application of the
date from which restatement is applied .
Scope of consolidation
All subsidiaries must be consolidated in the opening
IFRS balance sheet. The requirements of IAS 27
and SIC-12 are applied to determine the entities
that are consolidated as subsidiaries . There are no exemptions from the requirements
of IAS 27 and SIC-12 . Subsidiaries previously
excluded from consolidation are consolidated on
the basis that the subsidiary is a first-time
adopter at the same time as the parent [IFRS1.AppendixB2(j)]
.
Subsidiaries equity accounted under
previous GAAP do not follow the
goodwill recalculation requirements [IFRS1.AppendixB2(j)]. The notional goodwill calculated for equity accounting purposes under previous GAAP should be
used as goodwill under IFRS when the business combinations exemption is applied. This goodwill balance should be adjusted as required by the business combinations exemption for intangible assets
and contingent consideration or for impairment. The notional purchase price allocation
performed for equity accounting purposes under previous GAAP should form the basis for the carrying value
of the subsidiary's identifiable net assets under IFRS .
The business combinations exemption can also
be applied when an entity was not previously
required to apply the equity method or proportionate
consolidation .
Fair value as deemed cost
Fair value at the date of transition to IFRS
may be used as deemed cost for any individual
item of property, plant and equipment [IFRS1.16]
.
An entity may also elect to use a previous
GAAP revaluation at or before the date of transition
to IFRS as deemed cost for an item of property,
plant and equipment. The exemption can be used
when the revaluation was:
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at the date of revaluation, broadly
comparable to fair value [IFRS1.17] ; or |
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at the date of revaluation, broadly
comparable to cost or depreciated cost determined
under IFRS restated in accordance with a
general or specific price index [IFRS1.17]
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When the exemption is applied, the fair value
or revalued amount is the deemed cost at the
date at the revaluation for subsequent accounting
under IFRS. The deemed cost is depreciated in
accordance with IAS 16's requirements from the
date of the revaluation . The deemed cost less accumulated
depreciation is tested for impairment using
the guidance in IAS 36 whenever there is an
indication that the asset might be impaired
.
Any asset that has been subject to impairment
under previous GAAP should be assessed to ensure
that any impairment provision, and where applicable
reversal, has been calculated on a basis consistent
with IFRS.
A similar exemption may be applied to investment
property when an entity chooses the cost model,
and to intangible assets that meet the criteria
for revaluation in IAS 38 . The
exemption is not applied to other assets [IFRS1.18]
.
An entity that uses the exemption is not required
to use the revaluation model in
IAS 16 for subsequent measurement .
Fair value at the date of transition is used
as the deemed cost, and it does not establish
a policy of carrying any assets at fair value
. An entity that elects to adopt
the revaluation model in IAS 16
includes in the revaluation reserve at the date
of transition to IFRS the difference, if any,
between an asset's deemed cost and its fair
value .
An entity may also use a revaluation of any
asset or liability made in connection with a
specific event, such as a privatisation or an
initial public offering, provided that the revaluation
was to fair value at that date [IFRS1.19] .
A parent company should not use this exemption
in connection with the assets of a subsidiary
that already uses IFRS [IFRS1.25] .
Employee benefits
Employee benefit plans must be classified in
accordance with IAS 19 at transition . The assets and liabilities arising from
employee benefit plans are measured in accordance
with IAS 19 at the date of transition to IFRS
.
Entities can choose either to:
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recognise actuarial gains and losses
in the income statement immediately; |
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| ii) |
recognise gains the gains and losses
outside the income statement in a statement
of recognised income and expense (SORIE);
or |
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| iii) |
defer the gains and losses and recognise
them in the income statement over a number
of years. |
The exemption in IFRS 1 allows first-time adopters
that adopt a policy of deferring actuarial gains
and losses under IAS 19 to either:
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apply the deferral approach retrospectively,
in which case the entity must calculate
the deferred actuarial gains and losses
at the date of transition as if it had always
applied IAS 19 to its employee benefit plans,
from the inception of each plan. The deferred
gains and losses will be charged in the
income statement in the periods after transition;
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apply the deferral approach prospectively,
but recognise all actuarial gains and losses
arising before the date of transition in
the opening balance sheet [IFRS1.20] . |
An entity should not recognise unvested past
service cost on the opening IFRS balance sheet
.
The exemption must be applied consistently
to all pension plans.
A parent company should not use this exemption
in connection with the benefit plans of a subsidiary
that already uses IFRS [IFRS1.25] .
Cumulative translation differences
The cumulative translation adjustment may be
set to zero for all subsidiaries. The gain or
loss on disposal of a subsidiary after the date
of transition does not include any amount in
connection with the cumulative translation adjustment
before the date of transition, if the exemption
is applied [IF | 
