ifrs 1 first-time adoption june 09
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Internationalfinancial reportingdevelopmentsIFRS 1 First-time adoption of International
Financial Reporting Standards
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To our clients and other friends
To our clients and other friends
IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRS 1) was
developed by the International Accounting Standards Board (IASB) to help entities transition
to International Financial Reporting Standards (IFRS) as their basis for financial reporting.
The key principle of IFRS 1 is full retrospective application of IFRS standards that are
effective as of the entitys first IFRS reporting period. However, IFRS 1 establishes two types
of departure from the principle of full retrospective application of standards effective at the
end of the first IFRS reporting period: (1) optional exemptions from some of the requirements
of certain IFRS and (2) mandatory exceptions from the requirement for the retrospective
application of other IFRS.
IFRS 1 grants optional exemptions from the general requirement of full retrospective
application of the IFRS standards effective at the end of an entity's first IFRS reporting period
because in the IASBs view the cost of complying with them is likely to exceed the benefits tousers of financial statements. IFRS 1 also defines a number of mandatory exceptions that
prohibit retrospective application of IFRS in some areas, particularly when retrospective
application would require judgments by management about past conditions after the outcome
of a particular transaction is already known. The reasoning behind the mandatory exceptions
is that retrospective application of IFRS in these situations could easily result in an
unacceptable use of hindsight and lead to arbitrary or biased restatements, which would be
neither relevant nor reliable.
On 14 November 2008, the US Securities and Exchange Commission (SEC) issued a proposed
Roadmap on the potential use of IFRSas issued by the IASB in financial statements
prepared by US issuers. With the proposed Roadmap the adoption of IFRS is becoming agreater possibility in the United States.
This publication is therefore designed to assist professionals in understanding the
requirements of first-time adoption, and in particular the mandatory exceptions and voluntary
exemptions, under IFRS 1 and how IFRS 1 may affect US issuers transitioning from US GAAP
to IFRS. This publication reflects our current understanding of the provisions in IFRS 1 based
on our experience with financial statement preparers and related discussions with the IASB.
IFRS 1 continues to be amended as the IASB becomes aware of additional areas in which
preparers require accommodations to deal with transitional issues and when new standards or
amendments to existing standards are developed. While we will update this publication as
additional authoritative guidance is issued, preparers of financial statements should closely
monitor developments in this area.
30 June 2009
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Contents
Contents
1 Overview................................................................................................................... 11.1 Introduction.................................................................................................... 11.2 Scope ............................................................................................................. 21.3 Opening IFRS Balance Sheet Selection of Accounting Policies.......................... 5
1.3.1 First IFRS Reporting Period................................................................... 51.3.2 Date of Transition to IFRS and Opening IFRS Balance Sheet .................... 51.3.3 Retrospective Application of IFRS.......................................................... 61.3.4 Transitional provisions in other standards.............................................. 81.3.5 Adjustments to the Opening IFRS Balance Sheet .................................... 8
1.3.5.1 Recognize all assets and liabilities whose recognition is
required by IFRS.................................................................. 91.3.5.2 Derecognize items as assets and liabilities if such
recognition is not permitted by IFRS ................................... 101.3.5.3 Classify items recognized in accordance with IFRS............... 101.3.5.4 Measure all recognized assets and liabilities in
accordance with IFRS......................................................... 111.3.6 Opening balance sheet accounting policies........................................... 15
2 Mandatory prohibitions on retrospective application............................................... 162.1 Introduction.................................................................................................. 162.2 Estimates...................................................................................................... 162.3 Derecognition of financial assets and liabilities ................................................ 19
2.3.1 Potential issues applicable to first-time adopters that previouslyreported under US GAAP .................................................................... 212.3.1.1 Update on efforts to converge US GAAP with IFRS............... 21
2.4 Hedge accounting.......................................................................................... 222.4.1 Recognition and Measurement of derivatives that formed part of a
hedge relationship.............................................................................. 222.4.2 Prohibition on retrospective application............................................... 232.4.3 Hedge relationships reflected in the opening IFRS balance sheet ........... 242.4.4 Reflecting cash flow hedges in the opening IFRS balance sheet.............. 24
2.4.5 Potential issues applicable to first-time adopters that previouslyreported under US GAAP .................................................................... 252.4.5.1 Recognition and Measurement of derivatives that
formed part of a hedge relationship .................................... 252.4.5.2 Reflecting cash flow hedges in the opening IFRS
balance sheet .................................................................... 272.5 Non-controlling Interest................................................................................. 28
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3 Voluntary Exemptions From the Requirements of Certain IFRS ..............................293.1 Introduction...................................................................................................293.2 Business combinations ...................................................................................30
3.2.1 Effect of previous accounting ..............................................................313.2.2 First-time adopter elects to restate prior business combinations ............333.2.3 First-time adopter elects to not restate prior business combinations ......33
3.2.3.1 Classification of prior business combinationsdoes not change.................................................................34
3.2.3.2 Recognized assets acquired and liabilities assumed in aprior business combination .................................................35
3.2.3.3 Subsequent measurement under IFRS not based on cost ......373.2.3.4 Subsequent measurement under IFRS based on cost............383.2.3.5 Assets acquired and liabilities assumed but not
recognized in a prior business combination..........................413.2.3.6 Evaluation of goodwill.........................................................423.2.3.7 Currency adjustments to goodwill........................................45
3.2.4 Other issues .......................................................................................463.2.4.1 Contingent consideration....................................................463.2.4.2 Acquisition of non-controlling interest .................................48
3.2.5 Acquisitions of investments in associates and of interests in
joint ventures .....................................................................................493.3 Share-based payment transactions .................................................................49
3.3.1 Potential issues applicable to first-time adopters that previouslyreported under US GAAP.....................................................................513.3.1.1 Measurement and recognition of expense awards with
graded vesting features...................................................513.3.1.2 Modification of vesting terms..............................................533.3.1.3 Equity repurchase features.................................................543.3.1.4 Deferred taxes ...................................................................553.3.1.5 Nonvesting conditions (other than service, performance,
and market conditions)........................................................573.3.1.6 Transactions with non-employees .......................................583.3.1.7 Performance conditions......................................................60
3.4 Insurance Contracts.......................................................................................603.4.1 Potential issues applicable to first-time adopters that previously
reported under US GAAP.....................................................................613.5 Fair value or revaluation as deemed cost .........................................................62
3.5.1 Scope of the Fair value or revaluation as deemed cost exemption.......633.5.2 Determining deemed cost....................................................................643.5.3 Evaluating impairment indicators.........................................................67
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3.5.4 Potential issues applicable to first-time adopters that previouslyreported under US GAAP .................................................................... 673.5.4.1 Determining deemed cost................................................... 673.5.4.2 Calculating accumulated depreciation upon transition
to IFRS.............................................................................. 673.5.4.3 Effect of existing impairment indicators .............................. 69
3.6 Leases.......................................................................................................... 713.6.1 Potential issues applicable to first-time adopters that previously
reported under US GAAP .................................................................... 723.6.2 Future Developments ......................................................................... 72
3.7 Employee benefits......................................................................................... 733.7.1 Actuarial assumptions ........................................................................ 733.7.2 Exemption from presenting historical summary information.................. 733.7.3 Potential issues applicable to first-time adopters that previously
reported under US GAAP .................................................................... 743.7.3.1 Actuarial gains and losses .................................................. 743.7.3.2 Unrecognized past service cost........................................... 763.7.3.3 Plan assets........................................................................ 773.7.3.4 Curtailments...................................................................... 773.7.3.5 One-time termination benefits ............................................ 773.7.3.6 Full actuarial valuation....................................................... 783.7.3.7 Future convergence........................................................... 79
3.8 Cumulative translation differences ................................................................. 803.8.1 Hyperinflation .................................................................................... 813.8.2 Changes in functional currency ........................................................... 813.8.3 Potential issues applicable to first-time adopters that previously
reported under US GAAP .................................................................... 813.8.3.1 Hyperinflation ................................................................... 823.8.3.2 Available-for-sale monetary assets; foreign exchange
gains and losses................................................................. 823.9 Investments in a subsidiary, jointly controlled entity or associate...................... 833.10 Assets and liabilities of subsidiaries, associates and joint ventures...................... 84
3.10.1Previously unconsolidated subsidiaries ................................................ 843.10.2Previously consolidated entities that are not subsidiaries...................... 843.10.3Subsidiary becomes a first-time adopter later than its parent (for
purposes of separate subsidiary financial statements) .......................... 853.10.4Parent becomes a first-time adopter later than its subsidiary ................ 873.10.5Implementation guidance on accounting for assets and liabilities of
subsidiaries, associates and joint ventures ........................................... 893.10.6Adoption of IFRS in separate non-consolidated financial statements ........ 90
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3.10.7Potential issues applicable to first-time adopters that previouslyreported under US GAAP.....................................................................903.10.7.1 Different reporting dates of parent and subsidiary................903.10.7.2 Uniform accounting policies................................................913.10.7.3 Consolidation models .........................................................923.10.7.4 Equity method accounting ..................................................933.10.7.5 Qualified special-purpose-entity (QSPE) and
Investment companies........................................................933.10.8Future Developments..........................................................................94
3.10.8.1 Consolidation models .........................................................943.10.8.2 Joint venture proportionate accounting...............................943.10.8.3 Qualified special-purpose-entity (QSPE) ...............................94
3.11 Compound financial instruments and debt instruments withembedded derivatives ....................................................................................953.11.1Retrospective application of split accounting and
measurement challenges.....................................................................963.11.2Potential issues applicable to first-time adopters that previously
reported under US GAAP.....................................................................963.12 Designation of previously recognized financial instruments ..............................98
3.12.1 Implementation guidance on other categories of financial instruments.....1003.12.2Potential issues applicable to first-time adopters that previously
reported under US GAAP...................................................................1013.12.3 Future Developments........................................................................104
3.13 Fair value measurement of financial assets or financial liabilities.....................1043.13.1Potential issues applicable to first-time adopters that previously
reported under US GAAP...................................................................1053.13.2 Future Developments.......................................................................106
3.14 Changes in existing decommissioning, restoration, and similar liabilitiesincluded in the cost of property, plant and equipment.....................................1063.14.1Potential issues applicable to first-time adopters that previously
reported under US GAAP...................................................................1073.15 Service concession arrangements.................................................................110
3.15.1Potential issues applicable to first-time adopters that previouslyreported under US GAAP...................................................................1113.16 Borrowing Cost............................................................................................111
3.16.1Potential issues applicable to first-time adopters that previouslyreported under US GAAP...................................................................112
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4 Presentation and Disclosures................................................................................1134.1 Comparative information .............................................................................113
4.1.2 Potential issues applicable to first-time adopters that previouslyreported under US GAAP .................................................................. 113
4.2 Non-IFRS comparative information and historical summaries ......................... 1144.3 Explanation of transition to IFRS...................................................................115
4.3.1 Potential issues applicable to first-time adopters that previouslyreported under US GAAP .................................................................. 115
4.4 Reconciliations ............................................................................................ 1164.5 Correction of errors..................................................................................... 1174.6
Designation of financial assets and financial liabilities .................................... 118
4.7 Use of fair value as deemed costs ................................................................. 1184.8 Use of deemed cost for investments in subsidiaries, jointly controlled
entities and associates................................................................................. 1195 Interim Financial Statements................................................................................ 120
5.1 Potential issues applicable to first-time adopters that previously reportedunder US GAAP ........................................................................................... 121
6 Appendix...............................................................................................................1226.1 Proposed amendments to IFRS 1.................................................................. 122
6.1.1 Oil and gas exploration and production assets .................................... 1226.1.1.2 Potential issues applicable to first-time adopters thatpreviously reported under US GAAP.................................. 122
6.1.1.3 Future Developments....................................................... 1226.1.2 Rate regulated entities...................................................................... 123
6.1.2.1 Potential issues applicable to first-time adopters thatpreviously reported under US GAAP.................................. 124
6.1.2.2 Future Developments....................................................... 1246.2 Abbreviations used in this publication ........................................................... 125
Certain abbreviations of accounting standards are used throughout this publication.
Those abbreviations are defined in Appendix 6.2.
Portions of FASB publications reprinted with permission. Copyright Financial Accounting Standards Board, 401 Merritt 7,
P.O. Box 5116, Norwalk, CT 06856-5116, U.S.A. Portions of AICPA Statements of Position, Technical Practice Aids, and other
AICPA publications reprinted with permission. Copyright American Institute of Certified Public Accountants, 1211 Avenue of
the Americas, New York, NY 10036-8875, USA. Copies of complete documents are available from the FASB and the AICPA.
Portions of IASB publications and IASC Foundation standards reprinted with permission. Copyright International Accounting
Standards Committee Foundation, International Headquarters, 30 Cannon Street, London, EC4M 6XH, United Kingdom
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1 Overview
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1 Overview
1.1 IntroductionExcerpt from IFRS 1
1
1. The objective of this IFRS is to ensure that an entity's first IFRS financial statements,
and its interim financial reports for part of the period covered by those financial
statements, contain high quality information that:
a. is transparent for users and comparable over all periods presented;
b. provides a suitable starting point for accounting in accordance with International
Financial Reporting Standards (IFRSs); and
c. can be generated at a cost that does not exceed the benefits.
The International Accounting Standards Board (IASB or the Board) published IFRS 1 toprovide guidance for all entities to follow on their initial adoption of IFRS. IFRS 1 prescribes
the methodology to be followed in preparation of an entitys first set of IFRS financial
statements, beginning with its opening IFRS balance sheet. The opening IFRS balance sheet
then serves as the starting point for an entitys future accounting under IFRS. While full
retrospective application of IFRS is required upon adoption, the IASB recognized there were
certain situations in which the cost of a full retrospective application of IFRS would exceed the
potential benefit to investors and other users of the financial statements. In other situations,
the Board noted that retrospective application would require judgments by management
about past conditions after the outcome of a particular transaction is already known. As a
result, IFRS 1 contains a number of exemptions from the requirements of certain IFRS and
mandatory exceptions from full retrospective application of IFRS. This document providesfurther details and insight to these voluntary exemptions and mandatory exceptions, as well
as to the disclosure requirements of IFRS 1.
With the US Securities and Exchange Commissions (SEC) publication in November 2008 of its
proposed Roadmap, the adoption of IFRS is becoming a more likely possibility in the United
States. The proposed Roadmap sets forth several milestones that, if achieved, could result in
the mandatory use of IFRS in financial statements filed with the SEC by US issuers for years
ending 31 December 2014, 2015 and 2016, depending on the size of the issuer. The
Roadmap proposes early adoption for years ending after 15 December 2009 by a limited
number of large issuers that participate in an industry when the use of IFRS is more prevalent
than any other basis of accounting. Many US entities are beginning to think about what theirinitial IFRS financial statements will look like when they convert from US GAAP to IFRS.
IFRS 1, like all other standards within IFRS, is a living document and subject to
modifications and improvements as deemed necessary by the IASB. IFRS 1 was originally
created to address potential conversion issues for companies within the European Union and
1 In November 2008, the IASB issued a revised version of IFRS 1. IFRS 1 (Revised 2008) is effective for entities
applying IFRS for the first time for annual periods beginning on or after 1 July 2009.
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1 Overview
c. prepared a reporting package in accordance with IFRSs for consolidation purposes
without preparing a complete set of financial statements as defined in IAS 1
Presentation of Financial Statements (as revised in 2007); or
d. did not present financial statements for previous periods.
4. This IFRS applies when an entity first adopts IFRSs. It does not apply when, for
example, an entity:
a. stops presenting financial statements in accordance with national requirements,
having previously presented them as well as another set of financial statements
that contained an explicit and unreserved statement of compliance with IFRSs;
b. presented financial statements in the previous year in accordance with national
requirements and those financial statements contained an explicit and unreservedstatement of compliance with IFRSs; or
c. presented financial statements in the previous year that contained an explicit and
unreserved statement of compliance with IFRSs, even if the auditors qualified
their audit report on those financial statements.
5. This IFRS does not apply to changes in accounting policies made by an entity that
already applies IFRSs. Such changes are the subject of:
a. requirements on changes in accounting policies in IAS 8Accounting Policies,
Changes in Accounting Estimates and Errors; and
b. specific transitional requirements in other IFRSs.
An entity that presents financial statements in accordance with IFRS for the first time is a
first-time adopter as that term is used in IFRS 1, and it should apply IFRS 1 in preparing its
financial statements. IFRS 1 defines an entitys first IFRS financial statements as being the
first annual financial statements in which an entity adopts IFRS by making an explicit and
unreserved statement of compliance with IFRS in those financial statements. It should also
apply the standard in each interim financial report that it presents under IAS 34 for a part of
the period covered by its first IFRS financial statements.2
2 Note, for US public companies, it will ultimately be a decision of the SEC as to whether or not the interim
financial statements in the year of adoption of IFRS must be presented in accordance with IAS 34 or in
accordance with US GAAP. The SECs proposed Roadmap indicates that the SEC anticipates requiring entities to
adopt IFRS as part of an annual report, and that interim reporting in accordance with IAS 34 would not occur
until the next fiscal year (for example, interim reporting in accordance with IFRS would begin in 2015 for an
entity that is a first-time adopter in 2014). However, the proposed Roadmap also requests feedback on
alternative approach by which companies that early adopt IFRS can present their interim financial statements
during the first IFRS reporting period by filing a Form 10-K/A early in that period, which includes financial
statements of the prior two years under IFRS.
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1 Overview
general purpose IFRS financial statements that meet the objectives of the framework.3 As a
result, an entity may determine that those subsidiaries have not yet prepared IFRS compliant
financial statements and, therefore, should be considered first-time adopters.
Entities that adopt a new set of local accounting standards that are identical to IFRS should
consider including a statement of compliance with both the local accounting standards and
IFRS. In such situations, failure to make such a dual statement of compliance may subject the
entity to the application of IFRS 1 whenever it decides to state compliance with IFRS.
However, entities reporting under a local accounting standard that has gradually converged
with IFRS would be required to apply IFRS 1 the first time they chose to state compliance with
IFRS, even if that local accounting standard has ultimately become identical to IFRS.
1.3 Opening IFRS Balance Sheet Selection of Accounting Policies1.3.1 First IFRS Reporting Period
The first IFRS reporting period is the latest period covered by the first-time adopters first
IFRS financial statements. For example, fiscal year ending 31 December 2014 would be the
first IFRS reporting period for a calendar year-end entity that begins reporting under IFRS in
its 2014 financial statements.
In the US, a public entitys first reporting period likely will be mandated by the SEC. Based on
the SECs Roadmap, the mandatory first IFRS reporting period for US public companies will
be the fiscal year ending on or after December 15, 2014, 2015, or 2016 for large
accelerated filers, accelerated filers, and non-accelerated filers, respectively. Also, if the
SEC moves forward with its proposed rule, a limited number of entities would be allowed to
adopt IFRS as early as the fiscal year ending on or after December 15, 2009 as long as
certain criteria are met.
1.3.2 Date of Transition to IFRS and Opening IFRS Balance Sheet
Excerpt from IFRS 1
6. An entity shall prepare and present an opening IFRS statement of financial position at
the date of transition to IFRSs. This is the starting point for its accounting in
accordance with IFRSs.
The beginning of the earliest comparative period for which a first-time adopter presents full
comparative financial statements under IFRS will be its date of transitionto IFRS the startingpoint for accounting for assets, liabilities and equity accounts recognized as of the transition
date and subsequently. IFRS requires that a first-time adopters financial statements include
at least one comparative period, but a first-time adopter may elect to or be required to
3 It is important to note that if the subsidiary or branchs financial statements had contained an unreserved
statement of compliance with IFRS, that subsidiary or branch would no longer be considered a first-time adopter
and would not be eligible to apply the provisions of IFRS 1. However, we believe it is unlikely that financial
statements prepared solely for tax or other regulatory requirements would contain such a statement.
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provide more than one comparative period. For example, the SEC has indicated in its
proposed Roadmap that it likely will require US issuers to include two comparative periods for
all financial statements other than the statement of financial position in their first IFRS
financial statements.
At the date of transition to IFRS a first-time adopter must prepare, and present as part of its
first IFRS financial statements, an opening IFRS statement of financial position (that is, the
opening balance sheet). For example, 1 January 2012 is the date of transition to IFRS for a
first-time adopter that presents two years of comparative figures with a first IFRS reporting
period ended 31 December 2014.
The periods to be presented in a first-time adopters financial statements are discussed
further in Chapter 4.
1.3.3 Retrospective Application of IFRS
Excerpt from IFRS 1
7. An entity shall use the same accounting policies in its opening IFRS statement of financial
position and throughout all periods presented in its first IFRS financial statements. Those
accounting policies shall comply with each IFRS effective at the end of its first IFRS
reporting period, except as specified in paragraphs 13-19 and Appendices B-E.
8. An entity shall not apply different versions of IFRSs that were effective at earlier dates.
An entity may apply a new IFRS that is not yet mandatory if that IFRS permits early
application.IFRS 1 requires full retrospective application of IFRS in a first-time adopters financial
statements. This means that companies must retrospectively apply the current versions of
IFRS for all periods presented (opening IFRS balance sheet, comparative period(s) and
current period), except for those areas with specified limited relief as prescribed by IFRS 1. A
first-time adopter should not consider superseded or amended versions of IFRS in preparing
its first IFRS financial statements. For example, upon conversion to IFRS, account balances
existing at the date of transition and transactions after the date of transition to IFRS are all
restated using the standards effective at the end of the first IFRS reporting period. If a new
standard became effective between the date of transition to IFRS and the first IFRS reporting
period, that standard would be applied retrospectively because the standards to be applied in
the opening IFRS balance sheet are those that are in effect on the first IFRS reporting date(regardless of the transition provisions provided within the new standard), unless a specific
exemption in IFRS 1 provided differently.
When a first-time adopter is preparing its first IFRS financial statements, there may be
standards at the reporting date that have been issued by the IASB but that are not yet
effective. If those standards have transitional provisions that allow early application, the first-
time adopter may but is not required to apply them in its first IFRS financial statements.
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1.3.4 Transitional provisions in other standardsExcerpt from IFRS 1
9. The transitional provisions in other IFRSs apply to changes in accounting policies made
by an entity that already uses IFRSs; they do not apply to a first-time adopter's
transition to IFRSs, except as specified in Appendices B-E.
IFRS 1 makes clear that the transitional provisions in other IFRS standards apply only to
entities that already use IFRS; they do not apply to a first-time adopters transition to IFRS.
There are limited exceptions to this general rule relating to (1) insurance contracts, (2)
service concessions, (3) borrowing cost and (4) assets classified as held for sale and
discontinued operations (these items are discussed further in Chapter 3 of this publication).
The implication of this provision is that the requirements of IFRS 1 override the transitionalprovisions in all other IFRS for a first-time adopter.
The Board decided that whenever it issues a new IFRS, it would consider on a case-by-case
basis whether a first-time adopter should apply that IFRS retrospectively or prospectively.
The Board expects that retrospective application will be appropriate in most cases, given its
primary objective of comparability over time within a first-time adopters first IFRS financial
statements. However, if the Board concludes in a particular case that prospective application
by a first-time adopter is justified, it will amend IFRS 1 to make clear this requirement. For
example, in November 2006, the Board issued IFRIC 12, which contains guidance on
accounting for service concession arrangements. At the same time, the Board amended
IFRS 1 to allow first-time adopters to apply the transitional provision in IFRIC 12 as of the
entitys date of transition. See section 3.15 for a further discussion.
1.3.5 Adjustments to the Opening IFRS Balance Sheet
Excerpt from IFRS 1
10. Except as described in paragraphs 13-19 and Appendices B-E, an entity shall, in its
opening IFRS statement of financial position:
a. recognise all assets and liabilities whose recognition is required by IFRSs;
b. not recognise items as assets or liabilities if IFRSs do not permit such recognition;
c. reclassify items that it recognised in accordance with previous GAAP as one type
of asset, liability or component of equity, but are a different type of asset, liabilityor component of equity in accordance with IFRSs; and
d. apply IFRSs in measuring all recognised assets and liabilities.
Application of the general provisions in paragraph 10 of IFRS 1 regarding the preparation ofthe opening balance sheet is, however, not as straight forward as it may seem. Frequently an
entitys previous GAAP will have recognition or measurement differences (or both) with
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similar IFRS requirements.4 As a result, entities likely will spend a significant amount of time
in analyzing the amounts that should be reflected in the opening balance sheet. The
remainder of the discussion in this section focuses on differences between US GAAP and IFRSthat likely will result in entities having to adjust the amounts recorded in their US GAAP-based
balance sheet in order to create their opening IFRS balance sheet.
1.3.5.1 Recognize all assets and liabilities whose recognition is required by IFRS
Differences between US GAAP and IFRS may result in situations in which amounts are not
recognized on the US GAAP balance sheet but will need to be recognized in the opening balance
sheet to comply with IFRS. For example, one area in which there may be significant differencesfrom amounts recognized under US GAAP is the treatment of Qualified Special Purpose Entities
(QSPEs). While US GAAP contains certain provisions that allow for such entities to remain off
balance sheet, IFRS does not have similar scope exceptions in its consolidation rules, nor do any
of the voluntary exemptions or mandatory exceptions within IFRS 1 address the consolidationof entities. As a result, we believe it is possible that an entity that previously reported under
US GAAP may have to recognize additional assets and liabilities related to QSPEs under IFRS.See section 2.3.1 and 3.10.7.5 for a further discussion of this issue.
Another area in which a difference may exist between US GAAP and IFRS is restructuring
liabilities, as the timing of when such liabilities are recorded generally will differ under the two
GAAPs. For example, employee termination costs and contract termination costs potentiallymay be recorded earlier under IFRS than US GAAP. As this is an area not addressed by any of
the voluntary exemptions or mandatory exceptions of IFRS 1, entities may find that they need
to record additional restructuring liabilities as part of the IFRS opening balance sheet than theamounts previously recognized under US GAAP.
US GAAP and IFRS also potentially differ in the timing of the recognition of certain provisions.
Under the guidance in Statement 5, US GAAP uses a probable threshold to determine whenit is appropriate to recognize certain provisions. While IFRS uses similar probable
terminology, that term is defined in IAS 37 as more likely than not, a lower threshold than
the manner in which probable generally is applied under US GAAP. As a result, entities mayhave to recognize certain provisions under IFRS that previously were not recognized under
US GAAP. Moreover, provisions recognized may have to be discounted under IFRS while theywere not discounted under US GAAP.
An unrecognized intangible asset with a deemed cost other than zero is another example ofan item that is not recognized in a US GAAP balance sheet but may need to be recognized in
the opening IFRS balance sheet. See section 3.2.3.5 for more details.
See section 3.7.3.5 for an example that illustrates the recognition differences betweenUS GAAP and IFRS.
4 Throughout this publication, we generally assume the previous GAAP used was US GAAP, and base our
illustrative examples on that assumption. Companies whose previous GAAP is something other than US GAAP
may or may not encounter similar issues as US GAAP reporters upon conversion to IFRS.
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1 Overview
1.3.5.2 Derecognize items as assets and liabilities if such recognition is not
permitted by IFRS
Some assets and liabilities recognized under US GAAP may have to be derecognized underIFRS in the first-time adopters opening IFRS balance sheet. For example, under bothUS GAAP and IFRS, up-front connection fees in the utilities industry are deferred over theestimated customer relationship period. During this period, under US GAAP the associatedincremental direct costs, insofar as they do not exceed the deferred revenues, are deferredand recognized over the estimated customer relation period. However IFRS does not permitthese incremental direct costs to be capitalized.
1.3.5.3 Classify items recognized in accordance with IFRS
Differences may exist between an entitys previous GAAP and IFRS on the classification of
certain recognized assets and/or liabilities. IFRS 1 requires that once an entity has
appropriately identified all of the assets and liabilities to be recognized in the opening IFRS
balance sheet, those assets and liabilities must be classified in accordance with IFRS
requirements, regardless of how those items were classified under the entitys previous GAAP.
For example, one area in which there are differences in the classification/presentation of
assets and liabilities recognized under US GAAP and IFRS relates to the presentation of
discontinued operations. Currently, the definition of what constitutes a discontinued
operation differ under the two GAAPs. Under US GAAP, a discontinued operation is a
component of an entity that has been disposed of or is classified as held for sale provided that
(a) the operations and cash flows of the component have been (or will be) eliminated from the
ongoing operations of the entity as a result of the disposal transaction and (b) the entity willnot have any significant continuing involvement in the operations of the component after the
disposal transaction. A component of an entity may be a reportable segment or an operating
segment, a subsidiary or an asset group (the lowest level for which identifiable cash flows are
largely independent of the cash flows from other groups of assets and liabilities). Conversely,
IFRS 5 defines a discontinued operation as a component of an entity that either has been
disposed or is classified as held for sale and (a) represents a separate line of business or
geographical area of operations, (b) is part of a single coordinated plan to dispose of a
separate major line of business or geographical area of operations, or (c) is a subsidiary
acquired exclusively with a view to resale.5 As such, a first-time adopter may have presented
more discontinued operations under US GAAP than would be permitted under IFRS. As part
of the opening balance sheet, the entity would be required to reclassify assets and liabilitiespreviously classified as discontinued operations if the operation does not meet the definition
of a discontinued operation under IFRS.
5 A project currently is underway to eliminate the differences in these definitions under US GAAP and IFRS in this
area, with the FASB and IASB publishing exposure drafts in September 2008.
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Another area in which classification differences may occur between US GAAP and IFRS
relates to the classification of certain items as either liabilities or equity. As discussed more
fully in section 3.11.1, certain compound financial instruments that contain both liability and
equity components must be split into those separate components under IFRS, with each one
separately recognized. Those instruments may not have been classified in a similar manner
under US GAAP and may therefore need to be reclassified as part of the adjustments to the
opening balance sheet.
See section 3.3.1.3 for an example that illustrates the classification differences between
US GAAP and IFRS.
1.3.5.4 Measure all recognized assets and liabilities in accordance with IFRS
Once an entity has identified all the assets and liabilities that should be recognized inaccordance with IFRS, the entity must then apply the appropriate measurement principles of
IFRS to determine the amount at which those assets and liabilities should be recognized.
Different measurement criteria under IFRS could result in significant changes to the amounts
previously recognized under US GAAP.
Adjustments to amounts previously recognized may result from differences in the underlying
measurement objectives of US GAAP and IFRS. For example, US GAAP and IFRS contain
different measurement objectives surrounding the recognition of impairment on long-lived
assets. US GAAP requires impaired long-lived assets (that is, those for which the recoverably
test has indicated the assets are not recoverable) to be recognized based on the fair value of
those assets. Conversely, IFRS requires impaired long-lived assets to be recognized at thehigher of the fair value less costs to sell or the value in use. Value in use differs from fair
value as it is the present value of future cash flows from continued use including any disposal
value and therefore is based on entity-specific rather than market-specific assumptions.
As a result, upon transition to IFRS, any impairment previously recognized under US GAAP
would be remeasured in accordance with IFRS. Because impairment is measured at fair value
under US GAAP but at the higher of fair value less costs to sell or value in use under IFRS,
upon transition to IFRS, adjustments to the carrying amount of previously impaired assets
may be necessary. As discussed in section 3.5.3 a first-time adopter must evaluate its assets
for impairment in accordance with IAS 36. Because US GAAP first requires a recoverability
test to determine whether to measure and, if necessary, recognize, an impairment loss butIFRS does not there may be additional impairments to be recognized upon transition to IFRS
as discussed more fully in section 3.5.4.3.
As illustrated in the example below, there are also differences between US GAAP and IFRS in
the measurement objective of inventory in that the LIFO method of valuing inventory is
allowable under US GAAP but is prohibited under IFRS.
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Example 1.3.5.4 Subsequent Measurement of Acquired Finished Goods Inventory
Fact Pattern
On 1 December 2011, Entity A, a US GAAP reporter, purchased 100 units of finished goods
inventory at $1.00/unit. On 15 December 2011, it purchased an additional 100 units of
finished goods inventory at $1.20/unit. Entity A accounts for its inventory using the last-in,
first-out (LIFO) cost formula and uses the specific identification method for purposes of
determining LIFO cost. On 21 December 2011, Entity A sold 60 units and recorded a debit
to cost of goods sold and a credit to inventory of $72 (60 units * $1.20/unit). The ending
LIFO inventory balance in Entity As consolidated US GAAP financial statements as of
1 January 2012 was $148 [(100 units * $1.00/unit) + (40 units * $1.20/unit)].
Analysis
Entity A will become a first-time adopter and will present its first IFRS financial statements
as of and for the year ending 31 December 2014. In preparing its opening IFRS balance
sheet as of 1 January 2012, Entity A must determine whether it will subsequently account
for the finished goods inventory using either the first-in, first-out (FIFO) or weighted
average cost formula under IAS 2.(LIFO is not permitted.) If Entity A elects to use the FIFO
cost formula, the carrying amount of the inventory in the opening IFRS balance sheet as of
1 January 2012 must be restated to its FIFO cost or $160 [(40 units * $1.00/unit) + (100
units * $1.20/unit)]. The difference between the LIFO and FIFO ending inventory balances
of $12 would be recorded as an adjustment to retained earnings (before any adjustment
for income taxes).
Note: Because the US tax law requires conformity between the inventory costing method
for financial reporting and tax purposes, a change from LIFO to either FIFO or weighted
average cost, also may affect the calculation of certain domestic or foreign cash tax
liabilities. As the US continues to move towards the adoption of IFRS, we expect the
Internal Revenue Service to fully consider this issue.
Another example of differences in the measurement objectives between US GAAP and IFRS
relates to which assets and liabilities may be valued at fair value. For example, IFRS provides
entities with an accounting policy election to elect to value certain non-financial assets at fair
value that must be valued at historical cost under US GAAP, including investment property andproperty, plant and equipment. In addition, while both US GAAP and IFRS permit (but neither
requires) entities to elect fair value measurement for most financial assets and liabilities, the
ability to elect the fair value option is slightly more restrictive under IFRS due to certain
eligibility requirements.
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Even when the measurement objectives for recognized assets and liabilities are broadly aligned
between US GAAP and IFRS, differences may result from the specific application guidance
within the two GAAPs. For example, while both US GAAP and IFRS provide for the
measurement of certain assets and liabilities at fair value, in certain instances differences may
exist regarding the manner in which fair value is determined. While the principles underlying the
objective and determination of fair value measurements are generally consistent between
US GAAP and IFRS, specific differences exist that may affect the determination of fair value in
certain situations. As was the case under US GAAP prior to the issuance of Statement 157,
IFRS does not have a single definition of fair value, but instead provides application guidance in
varying levels of detail within the individual pronouncements that require (or permit) fair value
measurements. This guidance is often specific to the type of asset or liability being measured at
fair value (for example intangible assets under IAS 38 or investment property under IAS 40) or
the purpose of the fair value measurement (for example impairment of assets under IAS 36).6
Conversely, the measurement of fair value across US GAAP is generally based on a singular
definition applied within a consistent framework established by Statement 157 with the
intention of increasing the consistency of fair value estimates used in financial reporting.
The definition of fair value in US GAAP is based on an exit price notion with an explicit focus
on market participants assumptions regarding the use and pricing of the asset (or liability).
However, under IFRS the definition of fair value is based on an exchange transaction notion,
which is neither explicitly an exit price nor entry price. Depending on the particular
accounting pronouncement within IFRS, the application guidance may provide more or less
emphasis on an entry price notion from the perspective of the reporting entity , thereby
resulting in fair value measurements that are more entity-specific than market-basedmeasurements. In addition, specific differences between IFRS and US GAAP related to (i) the
recognition of inception (day one) gains and losses, (ii) the pricing of assets and liabilities
that transact in markets based on bid and ask prices, and (iii) the determination of the market
in which an asset or liability would be exchanged (that is, principal market vs. most
advantageous market) may result in the need for adjustments to the amounts of assets and
liabilities recognized at fair value under US GAAP in the opening IFRS balance sheet. These
differences are discussed in more detail in section 3.13.1.
It is important to note that IFRS 1, while providing for a number of voluntary exemptions and
mandatory exceptions on the accounting for certain types of transactions (as discussed
further below), provides no exemptions or exceptions relating to the accounting for incometaxes. As a result, a first-time adopter should apply IAS 12 as if it had always been the
governing standard. In this regard, a first-time adopter should recalculate its deferred taxes
based on the difference between the carrying amount of the assets and liabilities in the first-
time adopters opening IFRS balance sheet and their respective tax bases.
6 Note that the IASB currently has an active project on its agenda to develop further fair value measurement
guidance. The IASB issued a discussion paper in November 2006 and is currently deliberating the issue and
preparing an exposure draft.
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The first-time adopter also should recalculate the carrying amount of any non-controlling
interest after all adjustments (including deferred taxes) have been made to the first-time
adopters opening IFRS balance sheet. For example, if a first-time adopter derecognizes a
liability that previously was recognized under US GAAP in a subsidiary in which the first-time
adopter owns a majority ownership interest, the carrying amount of the non-controlling
interest should be increased for the non-controlling interests share of that derecognized
liability. Any resulting change in the carrying amount of the deferred taxes applicable to the
controlling interest generally should also be recorded as an adjustment to retained earnings
or, if appropriate, another category of equity.
Examples in this publication that illustrate when the measurement principles of IFRS may
differ from those in US GAAP and therefore, may result in adjustments to the assets and
liabilities recognized in the opening IFRS balance sheet are listed below:
2.2.1 Change in Estimate
3.2.3.3 Subsequent Measurement of Acquired Investment Property
3.2.3.4a Subsequent Measurement of Acquired Equipment
3.2.3.4b Provisionally Determined Fair Values
3.2.4.1 Contingent Consideration
3.3.1.1 Application of the Accelerated Recognition Method
3.3.1.3 Equity Repurchase Feature
3.3.1.4 Deferred Tax Benefit
3.5.4.2 Calculating accumulated depreciation upon transition to IFRS
3.5.4.3 Reversal of an Impairment Charge
3.7.3.1 Recognized Retirement Benefit
3.10.4 Parent Becomes a First-Time Adopter Later Than its Subsidiary
3.14.1 Decommissioning Liability
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1.3.6 Opening balance sheet accounting policiesExcerpt from IFRS 1
11. The accounting policies that an entity uses in its opening IFRS statement of financial
position may differ from those that it used for the same date using its previous GAAP.
The resulting adjustments arise from events and transactions before the date of
transition to IFRSs. Therefore, an entity shall recognise those adjustments directly in
retained earnings (or, if appropriate, another category of equity) at the date of
transition to IFRSs.
As a result of applying the provisions of paragraph 10 of IFRS 1 as discussed above, entities
may make changes to their accounting policies. As a result, adjustments will be necessary to
the carrying amounts of assets and liabilities previously recognized under US GAAP. IFRS 1provides that an entity shall recognize those adjustments directly in retained earnings (or, if
appropriate, another category of equity) at the date of transition to IFRS. (In only limited
circumstances the adjustments may affect goodwill. See section 3.2.3.6 below for a further
discussion of those limited adjustments affecting goodwill.) In addition, the first-time adopter
must consider the effects of such adjustments on deferred taxes and any non-controlling
interest (previously minority interest).
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2 Mandatory prohibitions onretrospective application
2.1 IntroductionExcerpt from IFRS 1
13. This IFRS prohibits retrospective application of some aspects of other IFRSs. These
exceptions are set out in paragraphs 14-17 and Appendix B.
IFRS 1 specifically prohibits restatement for certain transactions upon the initial adoption of
IFRS, as the retrospective application in those areas would require judgments by
management about past conditions after the outcome of the particular transactions. In
deliberating this Standard, the IASB determined that it would not be appropriate for
management to use hindsight to adjust previously recorded amounts, as doing so would lead
to arbitrary restatements that would be neither relevant nor reliable.
The mandatory exceptions in IFRS 1 provide another example of the detailed nature ofIFRS 1. The exceptions are essentially specific thou shalt not dos, not broad principles
that can or should be analogized or applied to similar situations. Further, unlike the
voluntary exemptions that are covered in Chapter 3 of this publication, entities must comply
with all of the mandatory exceptions provided in IFRS 1. Entities may not make policy
choices to apply only some or none of the exemptions. This is the case even when the
entitys previous GAAP is similar to IFRS for the applicable topic.
2.2 Estimates
Excerpt from IFRS 1
14. An entity's estimates in accordance with IFRSs at the date of transition to IFRSs shallbe consistent with estimates made for the same date in accordance with previous
GAAP (after adjustments to reflect any difference in accounting policies), unless there
is objective evidence that those estimates were in error.
15. An entity may receive information after the date of transition to IFRSs about estimates
that it had made under previous GAAP. In accordance with paragraph 14, an entity
shall treat the receipt of that information in the same way as non-adjusting events
after the reporting period in accordance with IAS 10 Events after the Reporting Period.
For example, assume that an entity's date of transition to IFRSs is 1 January 20X4 and
new information on 15 July 20X4 requires the revision of an estimate made in
accordance with previous GAAP at 31 December 20X3. The entity shall not reflect that
new information in its opening IFRS statement of position (unless the estimates need
adjustment for any differences in accounting policies or there is objective evidence
that the estimates were in error). Instead, the entity shall reflect that new information
in profit or loss (or, if appropriate, other comprehensive income) for the year ended 31
December 20X4.
16. An entity may need to make estimates in accordance with IFRSs at the date of
transition to IFRSs that were not required at that date under previous GAAP. To
achieve consistency with IAS 10, those estimates in accordance with IFRSs shall reflect
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conditions that existed at the date of transition to IFRSs. In particular, estimates at the
date of transition to IFRSs of market prices, interest rates or foreign exchange rates
shall reflect market conditions at that date
17. Paragraphs 14-16 apply to the opening IFRS statement of financial position. They also
apply to a comparative period presented in an entity's first IFRS financial statements,
in which case the references to the date of transition to IFRSs are replaced by
references to the end of that comparative period
IFRS 1 requires a first-time adopter to use estimates under IFRS that are consistent with the
estimates made for the same date under previous GAAP, after adjusting for any difference in
accounting policy, unless there is objective evidence that there were errors in those previous
estimates, as is defined in IAS 8. This requirement applies to both estimates made in respect
of the date of transition to IFRS and to those in respect of the end of any comparative periodsincluded in the first IFRS financial statements. For example, a US entitys first reporting date
under IFRS may be 31 December 2014, and based on SEC requirements those financial
statements will include years ended 31 December 2012, 2013, and 2014. That entity cannot
use information that became available in 2014 to adjust estimates made in the financial
statements for the year ended 2012 or 2013. A first-time adopter is not allowed to take into
account any subsequent events that provide evidence of conditions that existed at a balance
sheet date that came to light after the date its previous GAAP (for example, US GAAP)
financial statements were issued.
Under IFRS 1, a first-time adopter cannot apply hindsight and make better estimates when
it prepares its first IFRS financial statements. This also means that a first-time adopter is notallowed to take into account any subsequent events that provide evidence of conditions that
existed at a balance sheet date that came to light after the date its previous GAAP financial
statements were issued. In the Basis for Conclusions to IFRS 1,the IASB indicated that events
occurring from the date the previous GAAPs financial statements were issued through the
date of transition to IFRS might provide additional information regarding estimates made in
those previously issued financial statements. However, the IASB ultimately concluded that it
would be more helpful to users and more consistent with IAS 8 to recognize the revision of
those estimates as income or expense in the period when the first-time adopter made the
revision, rather than in preparing the opening IFRS balance sheet. Effectively, the IASB
wished to prevent first-time adopters from using hindsight to clean up their balance sheets
by direct write-offs to equity as part of the opening IFRS balance sheet exercise.
Further, if a first-time adopters previous GAAP accounting policy was not consistent with IFRS,
the entity may only adjust the estimate for the difference in accounting policy; it may not also
adjust the estimate to reflect the more current information available. In other words, the first-
time adopter uses information available at the time of the original previous GAAP accounting to
apply its new accounting policy. If an entity later adjusts those estimates, it accounts for the
revisions to those estimates as events in the period in which it makes the revisions.
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Example 2.2.1 Change in estimate
Fact pattern
In May 2010, Entity A, a US GAAP reporter, issued share-based compensation in the form
of stock options to its employees. The options have a service condition and vest on a
graded vesting schedule over 4 years (that is, 25% of the options are vested in May 2011,
another 25% in May 2012, and so on). Under US GAAP, the entitys accounting policy was
to measure each tranche of the award separately, but then to recognize compensation
expense over on a straight-line basis over the requisite period for the entire award (that is,
four years).
As of the grant date of the stock options, the entity believed the expected lives of the stockoptions ranged from two to six years. On 1 January 2012, Entity A estimates that the
expected lives of those awards range from 1.5 to five years.
Analysis
Entity A will become a first time adopter and will present its first IFRS financial statements
as of and for the year ended 31 December 2014. Its date of transition to IFRS is 1 January
2012. As part of its adoption of IFRS, it must evaluate its share-based payment awards
that are not yet vested as of its date of transition. Under IFRS, Entity A must recognize its
compensation expense on a straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in substance, multiple awards,
(that is, accelerated method).
Entity A therefore must apply the accelerated method under IFRS 2 to these share-based
payment awards to adjust for the difference in accounting policy between the straight-line
recognition and the accelerated recognition under IFRS 2. However, the fair value
calculation must be based on the facts and circumstances that existed at the time the
share-based payments were issued, not the date of adoption of IFRS. Therefore, Entity A
may not adjust the value of the awards based on its revised estimates of the expected lives
of the awards.
In relation to financial instruments, IFRS 1 requires a first-time adopter that is unable to
determine whether a particular portion of an adjustment is a transitional adjustment or achange in estimate to treat the adjustment as a change in accounting estimate under IAS 8,
with appropriate disclosures as required by paragraphs 32 to 40 of IAS 8. For example, IFRS
may dictate a different effective interest methodology for a particular financial instrument
than an entitys previous GAAP required. An entity converting to IFRS would have to follow
the required IFRS methodology. However, IFRS also requires the entity to estimate the timing
of the principal payments on that financial instrument. For an entity converting to IFRS and
simultaneously updating its principal payments projections, it would be difficult to bifurcate
the change in estimate between that which was a result of the new application of IFRS (that
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IFRS 1 acknowledges that some arrangements for the transfer of assets, particularly
securitizations, may last for some time, with the result that transfers might be made both
before and on or after 1 January 2004 under the same arrangement. IFRS 1 clarifies that
transfers made under such arrangements fall within the first-time adoption provisions only if
they occurred before 1 January 2004. In other words, if a first-time adopter derecognized
non-derivative financial assets or non-derivative financial liabilities under its previous GAAP in
a financial year beginning before 1 January 2004, it does not recognize those assets and
liabilities under IFRS (unless they qualify for recognition as a result of a later transaction or
event). However, transfers on or after 1 January 2004 are subject to the full requirements of
IAS 39 and will have to be re-evaluated to determine whether they meet the criteria for
derecognition. Therefore, unless the derecognition requirements of IAS 39 are satisfied,
assets and liabilities transferred after 1 January 2004 must be recognized under IFRS.
A first-time adopter is not exempt from SIC-12, which requires consolidation of all special
purpose entities (SPEs), including qualifying special-purpose entities. In other words, SIC-12
contains no specific transitional or first-time adoption provisions. Accordingly, the SIC-12
requirements with regard to the consolidation of SPEs are fully retrospective for first-time
adopters. As a result, not all previously derecognized assets and liabilities will remain off-
balance sheet upon adoption of IFRS. For example, if under its previous GAAP an entity
derecognized non-derivative financial assets and non-derivative financial liabilities as the result
of a transfer to an entity treated as an SPE by SIC-12, those assets and liabilities may be
required to re-recognized on transition to IFRS, as the result of consolidation of the SPE rather
than through application of IAS 39. However, if the SPE itself then subsequently transferred
the asset and achieved derecognition of the items concerned under the entity's previous GAAP(other than by transfer to a second SPE or member of the entity's group), then the items
remain derecognized on transition.
A first-time adopter may elect to apply the derecognition requirements in IAS 39
retrospectively from a date of the entity's choosing prior to 1 January 2004, provided that
the information needed to apply IAS 39 to financial assets and financial liabilities
derecognized as a result of past transactions was obtained at the time of initially accounting
for those transactions. Therefore, an entity that was not permitted to derecognize
transferred financial assets under its previous GAAP may be able to derecognize the assets
through retrospective application of IAS 39, provided the entity also retained
contemporaneous documentation of its original basis for conclusion. However, the limitationon the retrospective application of IAS 39 helps to prevent the re-estimation of
measurements used in the risk and rewards analysis pursuant to IAS 39 (such as fair values)
with the unacceptable benefit of hindsight. This limitation, effectively also bans most first-
time adopters from restating transactions that occurred before 1 January 2004 because the
required contemporaneous documentation likely would not have been prepared or
maintained as of the date of transfer.
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2.3.1 Potential issues applicable to first-time adopters that previouslyreported under US GAAP
While the transition provisions of IFRS 1 related to derecognition of financial assets and
liabilities provided significant relief for many European entities that converted to IFRS on 1January 2004, it will provide little or no relief for first-time adopters that previously reported
under US GAAP that will have a transition date of 1 January 2012 or later, based on the
SECs proposed Roadmap. In addition, the option to retrospectively apply the derecognition
requirements under IAS 39 may not benefit many first-time adopters that previously reportedunder US GAAP because off-balance sheet accounting for structured financings generally is
considered more difficult to achieve under IFRS.
Under US GAAP, special derecognition rules apply to asset-backed financing arrangements orsecuritization transactions involving qualifying special-purpose entities (QSPEs), as definedin Statement 140. An enterprise that transfers assets to a QSPE or that holds a variable
interest therein generally does not apply the consolidation requirements of FIN 46(R), unless
the enterprise has the unilateral ability to cause the entity to liquidate or to change the entity
so that it is no longer a QSPE. However, the notion of a QSPE does not exist under IFRS, andas a result, we believe off-balance sheet financing will be more difficult to achieve under IFRS.
In short, entities currently engaged in off-balance sheet securitization financings (that have
been derecognized under US GAAP) may have to re-recognize many of the financial assets
previously derecognized unless the IASB decides to amend the first-time adoption transitionprovisions to accommodate companies converting from US GAAP (for example, by extending
the effective date for applying IAS 39 to transactions occurring after 1 January 2012).
2.3.1.1 Update on efforts to converge US GAAP with IFRS
In June 2009, the FASB issued Statement 166. Statement 166 is designed to make short-
term improvements to Statement 140 until such time as converged standards on
derecognition and consolidation are developed with the IASB. In the meantime, Statement
166 improves convergence with IFRS by eliminating the concept of a QSPE, including theexception for QSPEs from the consolidation guidance of FIN 46(R), and by limiting the
portions of financial assets that are eligible for derecognition. The amendments are effective
for fiscal years beginning after 15 November 2009 (that is, 1 January 2010 for calendaryear companies) and earlier application is prohibited.
Convergence between US GAAP and IFRS also may be advanced with recent proposals to
change the accounting for transfers of financial instruments under IFRS. In March 2009, the
IASB published for public comment an exposure draft of proposals to improve thederecognition requirements for financial instruments. The IASB believes its proposed
approach is similar in some respects to Statement 166. For example, the exposure draft
would replace the current mixed derecognition model under IAS 39, which combines
elements of risks and rewards and control, with a single element model that would giveprimacy to control. Therefore, like US GAAP, the proposed approach under IFRS would assess
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derecognition on the basis of control, and evaluate control in a somewhat similar manner. A
major difference between the derecognition requirements under US GAAP and the proposed
approach in the exposure draft is that the approach proposed in the exposure draft does notrequire a legal isolation test to determine whether effective control has been surrendered. A
final amendment of the IAS 39 derecognition guidance is expected to be issued sometime
during 2010.
Now that the FASB has completed its short-term amendments to Statement 140, the two
Boards have committed to work jointly and expeditiously to ultimately issue a converged
derecognition standard. However, it is unclear whether convergence between the two
accounting standards will be achieved before US issuers are required to transition to IFRS.
2.4 Hedge accounting2.4.1 Recognition and Measurement of derivatives that formed part of a
hedge relationship
Excerpt from Appendix B of IFRS 1
B4. As required by IAS 39, at the date of transition to IFRSs, an entity shall:
(a) measure all derivatives at fair value; and
(b) eliminate all deferred losses and gains arising on derivatives that were reported in
accordance with previous GAAP as if they were assets or liabilities.
B5. An entity shall not reflect in its opening IFRS statement of financial position a hedging
relationship of a type that does not qualify for hedge accounting in accordance with
IAS 39 (for example, many hedging relationships where the hedging instrument is a
cash instrument or written option; where the hedged item is a net position; or where
the hedge covers interest risk in a held-to-maturity investment). However, if an entity
designated a net position as a hedged item in accordance with previous GAAP, it may
designate an individual item within that net position as a hedged item in accordance
with IFRSs, provided that it does so no later than the date of transition to IFRSs.
B6. If, before the date of transition to IFRSs, an entity had designated a transaction as a
hedge but the hedge does not meet the conditions for hedge accounting in IAS 39 the
entity shall apply paragraphs 91 and 101 of IAS 39 to discontinue hedge accounting.
Transactions entered into before the date of transition to IFRSs shall not beretrospectively designated as hedges.
IFRS 1 provides that a first-time adopter should not reflect in its opening IFRS balance sheet a
hedging relationship of a type that does not qualify for hedge accounting under IAS 39. In
addition, IFRS 1 only allows prospective application of the hedge accounting provisions of IAS
39 by a first-time adopter from the date the hedge accounting criteria are met. That is to say,
a first-time adopter is prohibited from applying retrospectively some of the hedge accounting
provisions of IAS 39.
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In making this determination, the Board felt that it was unlikely that most entities would have
adopted IAS 39s criteria for (a) documenting hedges at their inception and (b) testing the
hedges for effectiveness prior to adopting IAS 39, even if they intended to continue the same
hedging strategies after adopting IAS 39. Furthermore, the Board was concerned that
retrospective designation of hedges (or retrospective reversal of their designation) could lead
to selective designation of some hedges to report a particular result. Therefore, the Board
decided that transactions entered into before the date of transition to IFRS cannot be
retrospectively designated as hedges under the hedge accounting provisions of IAS 39.
Hedge designation that is compliant with IAS 39 must be completed on or before the
transition date to IFRS in order to qualify for hedge accounting after the transition date (no
retrospective designation is permitted).
If, before the date of transition to IFRS, the first-time adopter had designated a transaction asa hedge under its previous GAAP but the hedge does not meet the requirements for hedge
accounting in IAS 39 at the transition date (for example, because the documentation does not
conform to the IAS 39 requirements and such documentation is not adjusted to conform prior
to or at the transition date), the entity must discontinue hedge accounting prospectively.7
A first-time adopter is required to account for all derivatives in its opening IFRS balance sheet
as assets or liabilities measured at fair value. It is important to note that under IFRS all
derivatives, other than those that are designated and are effective hedging instruments, are
classified as held for trading. (As a result, such instruments must be measured at fair value
with changes in fair value recognized in income each period.) When a derivative was not
explicitly recognized as an asset or liability under previous GAAP, the difference between theprevious carrying amount (which might be zero) and its fair value at the transition date should
be recognized as an adjustment of the balance of retained earnings at the transition date.
2.4.2 Prohibition on retrospective application
A first-time adopter is not permitted to designate hedges retrospectively in relation to
transactions entered into before the date of transition to IFRS. This requirement is to prevent
an entity from reflecting hedge relationships in its opening balance sheet that it did not
identify as such under the entitys previous GAAP. Further, the implementation guidance to
IFRS 1 explains that hedge accounting can be applied prospectively only from the date the
hedge relationship is fully designated and documented. Therefore, if the hedging instrument
is still held at the date of transition to IFRS, the designation and documentation of a hedgerelationship must be completed on or before that date if the hedge relationship is to qualify
for hedge accounting on an ongoing basis from that date.
7 This would be accomplished by applying paragraphs 91 and 101 of IAS 39 (as revised in 2003).
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2.4.3 Hedge relationships reflected in the opening IFRS balance sheetIFRS 1 provides that a hedge relationship should be reflected in the first-time adopters
opening IFRS balance sheet if it has been accounted for as a hedge relationship under
previous GAAP and the hedge relationship is a type that is eligible under IAS 39. Note that
satisfying the hedge accounting criteria (for example, passing the effectiveness test) under
IAS 39 is not a factor in deciding whether hedge accounting should be applied on transition.
As long as a hedge relationship can be specifically identified under a first-time adopters
previous GAAP and that hedge relationship would be a type that qualifies for hedge
accounting under IFRS (even if it is not subsequently pursued), then the first-time adopter
must account for the hedge relationship and recognize the hedging instrument in its opening
IFRS balance sheet.
We believe that the phrase hedge relationship is a type that is eligible under IAS 39
describes a hedge relationship for which both the hedging instrument and the hedged item
are eligible to be paired together in a IAS 39 hedge relationship. We do not believe that the
hedge effectiveness assessment and/or measurement methodologies used under US GAAP
for the hedge relationship must also have beenpreviously compliant with IAS 39 in order for
the hedge relationship to be viewed as a type that is eligible under IAS 39.
However, in order for a first-time adopter to continue to apply hedge accounting subsequent
to the transition date, all of the designation, effectiveness and documentation requirements of
hedge accounting under IAS 39 must be satisfied as of the date of transition to IFRS. If the
hedge relationship does not meet the requirements in IAS 39 prospectively, then hedge
discontinuation rules in that standard must apply immediately after transition. Further, if anentity wishes to continue to apply hedge accounting subsequent to the transition date, all of
the designation, effectiveness and documentation requirements of hedge accounting under
IAS 39 must be satisfied for each period in which the entity wishes to apply hedge accounting.
2.4.4 Reflecting cash flow hedges in the opening IFRS balance sheet
Excerpt from Implementation Guidance of IFRS 1
IG60B An entity may, under previous GAAP, have deferred gains and losses on a cash flow
hedge of a forecast transaction. If at the date of transition to IFRS, the hedged
forecast transition is not highly probable, but expected to occur, the entire deferred
gain or loss is recognized in equity. Any net cumulative gain or loss that has beenreclassified to equity on initial application of IAS 39 remains in equity until (a) the
forecast transaction subsequently results in recognition of a non financial asset or non
financial liability, (b) the forecast transaction affects profit or loss or (c) subsequently
circumstances change and the forecast transaction is no longer expected to occur, in
which case any related net cumulative gain or loss that had been recognized directly
in equity is recognized in profit and loss. If the hedging instrument is still held but the
hedge does not qualify as a cash flow hedge under IAS 39, hedge accounting is no
longer appropriate starting from the date of transition to IFRS.
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IAS 39 requires that hedged forecast transactions must be highly probable in order to achieve
cash flow hedge accounting. While IAS 39 states that the term highly probable indicates a
much greater likelihood of happening than the term more likely than not, there is no
prescriptive definition of highly probable provided in IAS 39. If as of the date of transition
to IFRS the hedged forecast transaction is not highly probable but is still expected to occur,
the entire unrecognized portion of the fair value of the hedging derivative is taken to the cash
flow hedge reserve in equity in the opening IFRS balance sheet. If, at the date of transition to
IFRS, it was not possible the forecast transaction will occur, this would be a relationship of a
type that does not qualify for hedge accounting under IAS 39. Therefore, the hedging
relationship would not be reflected in the opening IFRS balance sheet and the deferred gains
and losses would be recognized in retained earnings.
2.4.5 Potential issues applicable to first-time adopters that previously
reported under US GAAP
2.4.5.1 Recognition and Measurement of derivatives that formed part of a hedge
relationship
The likelihood of satisfying IAS 39s criteria for hedge accounting may be relatively high for
first-time adopters that originally accounted for hedging relationships in accordance with
Statement 133. Both IAS 39 and Statement 133 define three types of hedge relationships:
1) fair value hedges, 2) cash flow hedges, and 3) net investment hedges. In addition, the
risks that can be hedged and the hedging instru
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