ifrs 1 - adoption of ifrs. academic resource center adoption of ifrs page 2 executive summary ►...

IFRS 1 - Adoption of IFRS

Academic Resource Center

Adoption of IFRS

Executive summary

► IFRS 1 applies to first-time adoptions of IFRS. A first-time adoption is the year in which the entity first files financial statements that contain an explicit statement that the financial statements comply with IFRS.

► The general rule is that the assets, liabilities and equity reported on the opening statement of financial position should be measured using retrospective application of the relevant IFRS standards. There are some exceptions, both mandatory and voluntary, to this general rule.

► To the extent that the assets, liabilities and equity of the opening statement of financial position measured under IFRS differ from those measured on the same date under the entity’s previous GAAP, the adjustments should be recognized directly in retained earnings.

► There are various presentation and disclosure requirements, including the presentation of comparative information and a reconciliation of comprehensive income and equity from previous GAAP to IFRS.


Adoption of IFRS

Objectives of the first-time adoption standard

► The first set of IFRS financial statements should be high quality.► The first set of IFRS financial statements should be transparent and

comparable over all periods presented.► The first set of IFRS financial statements should provide a good starting point

for accounting under IFRS.► The first set of IFRS financial statements should be generated such that the

benefits exceed the costs.


Adoption of IFRS

Scope

► What constitutes a first-time adoption?► A first-time adoption is the year in which the entity first files financial statements that

contain an explicit statement that the financial statements comply with IFRS.

► The first-time adoption requirements should be applied to both the first set of annual statements as well as any interim statements for any part of the period covered by the first annual statements. For public companies in the United States quarterly interim statements are required and in foreign jurisdictions quarterly or semi-annual interim statements are generally required.


Adoption of IFRS

Recognition and measurement

► The opening statement of financial position should be presented using the same accounting policies that are used for all periods presented in the first-time IFRS financial statements. These accounting policies should generally be those that are consistent with the IFRS standards that are effective at the end of the first IFRS reporting period.


Adoption of IFRS

Example 1 – Use of IFRS standards in effect at the end of the first IFRS reporting period

The reporting date for Surfs Up Inc.’s (SUI) first IFRS financial statements is December 31, 2014. SUI is an SEC registrant and therefore must present comparative periods as part of its financial statements. SUI presented previous financial statements under US GAAP each year, up to and including December 31, 2013. The IASB published a new standard on revenue recognition in 2011, with an effective date of January 1, 2013.


► Should SUI report under the new revenue recognition standard for all periods presented?

► Now assume that the new revenue recognition standard had an effective date of fiscal periods beginning on or after January 1, 2015, with early adoption permitted. In this case, should SUI report under the new revenue recognition standard for all periods presented?


Adoption of IFRS

Example 1 solution:

►In its first IFRS reporting period (December 31, 2014) financial statements, SUI must apply IFRS standards effective for the period ending on December 31, 2014, including the new revenue recognition standard, for all periods presented, including:

► The effect of the new revenue recognition standard in any revenue-related balance sheet accounts in its opening IFRS balance sheet at January 1, 2012 (as well as in the balance sheets for December 31, 2013 and 2014).

► The provisions of the new revenue recognition standard in its income statement, cash flows and statement of changes in equity, for the years ended December 31, 2012, 2013 and 2014, including footnote disclosures.

►If the new standard of revenue recognition had an effective date of fiscal periods beginning on or after January 1, 2015, with early adoption permitted, the entity would have the choice of whether to adopt the new standard in its first IFRS financial statements or to adopt the standard on its effective date.



Adoption of IFRS


► The general rule is that the assets, liabilities and equity reported on the opening statement of financial position should be measured using retrospective application of the relevant IFRS standards. However, there are some mandatory and some voluntary exceptions to this general rule. These are discussed later.

► To the extent that the assets, liabilities and equity of the opening statement of financial position measured under IFRS differ from those measured on the same date under the entity’s previous GAAP, the adjustments should be recognized directly in retained earnings.


Adoption of IFRS

Example 2 – Difference in measurement of assets, liabilities and equity

Beach Bums is a US GAAP reporter that accounts for its inventory using the last-in, first-out (LIFO) method. For internal reporting purposes, it utilizes the first-in, first-out (FIFO) method. On December 1, 2011, Beach Bums purchased 100 units of finished goods inventory at $1.00 per unit. On December 15, 2011, it purchased an additional 100 units of finished goods inventory at $1.20 per unit. Beach Bums accounts for its inventory using the LIFO cost formula and uses the specific-identification method for purposes of determining LIFO cost. On December 21, 2011, Beach Bums sold 60 units and recorded a debit to cost of goods sold and a credit to inventory of $72 (60 units x $1.20 per unit). The ending LIFO inventory balance


► At what amount will Beach Bums report inventory on the opening statement of financial position? What is the necessary journal entry (ignoring any related tax impact)?

in Beach Bums’ consolidated US GAAP financial statements as of January 1, 2012, was $148 [(100 units x $1.00 per unit) + (40 units x $1.20 per unit)].

Beach Bums will become a first-time adopter and will present its first IFRS financial statements as of and for the year ending December 31, 2014. Since LIFO is not allowed under IFRS, Beach Bums decides to use the FIFO method to value inventory.


Adoption of IFRS

Example 2 solution:

Beach Bums must restate its carrying amount of the inventory in the opening IFRS statement of financial position as of January 1, 2012, to its FIFO cost or $160 [(40 units x $1.00 per unit) + (100 units x $1.20 per unit)]. The difference between the LIFO and FIFO ending inventory balances of $12 ($148 - $160) would be recorded as an adjustment to retained earnings (before any adjustment for income taxes).

Thus, the journal entry would be as follows:

Inventory (LIFO reserve) $12

Retained earnings $12



Adoption of IFRS

Exceptions to the retrospective measurementMandatory exceptions

► Derecognition of financial assets and financial liabilities: ► In general, if the entity derecognized a financial asset or liability as a result of a transaction

that occurred before the date of transition to IFRS, they will not recognize these items under IFRS.

► Hedge accounting: ► At the date of adoption of IFRS an entity should fair value all derivatives and eliminate all

deferred gains and losses. ► If the entity has a net position that it had designated as a hedge in accordance with

previous GAAP, then it can continue to designate individual items within that net position as hedged items under IFRS.


Adoption of IFRS


► Non-controlling interests: ► Various requirements related to the accounting for non-controlling interests are to be

applied prospectively, including the attribution of total comprehensive income to non-controlling interests and the accounting for changes in parent ownership

► Classification and measurement of financial assets: ► The entity should assess the conditions specified in IFRS 9 4.2 under which a financial

asset should be measured at amortized cost as of the date the entity transitions to IFRS.

► Estimates: ► Estimates should be made on the date of transition to IFRS to be consistent with

estimates according to previous GAAP, with adjustments made to reflect any differences in accounting policies, unless there is objective evidence the estimates were in error.


Adoption of IFRS

Example 3 – Estimates

► What amounts should be included in the comparative balance sheets for the warranty liability as of January 1, 2011?

Palm Inc. (Palm), a manufacturing company, provides for claims on its products under warranty based on experience to date. It provided $8,000 for this in its financial statements for the year ended December 31, 2010, which were prepared under its national GAAP. These financial statements were signed off on March 5, 2011. Palm discovered in July 2011 that a major product is defective and must be recalled. Consequently, the warranty provision at December 31, 2010, was understated by $4,000.

Palm’s date of transition to IFRS is January 1, 2012.



Adoption of IFRS

Example 3 solution:

The warranty provision was originally derived based on conditions existing at the balance sheet date and information available through the sign-off date. Under IFRS 1, previous estimates are retained unless they can be objectively shown to have been in error. As Palm’s warranty provision was correctly calculated based on all the information that was available at the time, it is therefore retained at its original amount of $8,000. The effect of the new information about the defective product will be reported by Palm as an expense of $4,000 in 2011.



Adoption of IFRS

Exceptions to the retrospective measurementVoluntary exceptions

► Share-based payments: ► The entity is not required to apply IFRS 2, Share-based Payment, to instruments that were

granted prior to November 8, 2002. The entity is also not required to apply IFRS 2 to equity instruments that were granted after November 7, 2002, and vested before the transition to IFRS.

► PP&E: ► The entity may elect to determine the cost of PP&E, certain investment property and

certain intangible assets using either fair value at the date of transition or a revaluation made under previous GAAP before or at the date of transition (subject to certain restrictions). Thus, if an entity uses the revaluation option to determine deemed cost, then they do not need to recompute the life-to-date depreciation on PP&E under the component approach.


Adoption of IFRS

Example 4 – PP&E

Oasis, a US GAAP reporter, purchased a building 10 years ago for which the historical cost is $1.2 million. Upon further evaluation, Oasis determines that the building has four separate components — heating and cooling, roof, electrical (including telephone and internet) and the remainder of the building. However, as permitted under US GAAP, Oasis has been depreciating the building as a single component over 40 years. Oasis will become a first-time adopter and will present its first IFRS financial statements as of and for the

► How should Oasis report this building in its first set of IFRS financial statements?

► Now assume that Oasis did not know the fair value of the building on its date of transition, but evaluated the building for impairment two years prior to the transition date (January 1, 2010) and determined the fair value of the building to be $900,000 at that time. How should Oasis report the building in its first set of IFRS financial statements?


year ended December 31, 2014. Oasis has determined that the fair value of the building at the date of transition to IFRS (January 1, 2012) is $1.1 million. The fair value of the heating and cooling is $200,000, the roof is $100,000, the electrical is $250,000 and the rest of the building is $550,000.


Adoption of IFRS

Example 4 solution:

►Under IFRS 1, Oasis has the option to use either the historic cost adjusted for component depreciation or the current fair value of the building and the individual components as its deemed cost in its opening IFRS balance sheet and to base the future component depreciation on that amount. A first-time adopter may prefer this approach when recalculation of historic depreciation using the component approach could be cumbersome. ►Oasis may elect to use the $900,000 as the deemed cost at January 1, 2010, and calculate the appropriate depreciation amount under IFRS for each component from that date forward, as long as the valuation meets certain criteria. Under this approach, an entity would still have to determine the fair value of the building’s components as of the date of the impairment analysis in order to have the necessary information for its component depreciation calculations. If the first-time adopter elected to use either the current fair value or a previous valuation amount as the deemed cost, any adjustments to the historical carrying amount of the building would be reflected in the opening retained earnings at the transition date.



Adoption of IFRS


► Leases: ► The entity may determine whether a particular arrangement contains a lease, based on the facts and

circumstances that exist on the date of transition to IFRS.► Severe hyperinflation:

► An exemption applies to an entity that was subject to severe hyperinflation and has previously applied IFRS or is adopting IFRS for the first time. This exemption allows an entity to measure at fair value certain assets and liabilities and to use this fair value as deemed cost in the opening statement of financial position. The amendment to IFRS 1 that provides this exception is effective for annual periods beginning on or after July 1, 2011. Early adoption is permitted.

► Employee benefits: ► In its opening IFRS balance sheet, a first-time adopter applies IAS 19, Employee Benefits, to measure

assets or liabilities under defined benefit plans. Under IAS 19, it may elect to use a corridor approach that leaves some actuarial gains and losses unrecognized. IFRS 1 allows a first-time adopter to elect to recognize all cumulative actuarial gains and losses at the date of transition.


Adoption of IFRS

Example 5 – Employee benefits

Sail Away, a US GAAP reporter, has a defined benefit pension plan with the following characteristics on December 31, 2011 (in thousands):

► How should Sail Away present its defined benefit pension plan in its first set of IFRS financial statements? Please provide necessary journal entries (ignoring the related income tax impact).


Defined benefit obligation $ (2,700)Fair value of plan assets 1,700Funded status recorded on the

statement of financial position $ (1,000)

Unrecognized actuarial losses $ 200

Under US GAAP, the total unrecognized actuarial losses of $200 are reflected within accumulated other comprehensive income after tax and will be recognized in the income statement in future periods as a component of the net periodic pension cost. Sail Away will become a first-time adopter and will present its first IFRS financial statements as of and for the year ended December 31, 2014. At the date of transition to IFRS (January 1, 2012), the first-time adopter has elected to apply the IFRS 1 exemption to zero out all cumulative actuarial gains and losses at the date of transition.


Adoption of IFRS

Example 5 solution:

Under IAS 19, the retirement benefit obligation would be presented as follows (in thousands) in the opening statement of financial position on January 1, 2012:

As a result, the first-time adopter will record an adjustment to remove unrecognized actuarial losses from accumulated other comprehensive income, with an offsetting entry to retained earnings. The journal entry would be as follows:

Retained earnings $200Accumulated OCI $200


Defined benefit obligation $ (2,700)Fair value of plan assets 1,700

Funded status recorded on the statement of financial position $ (1,000)


Adoption of IFRS


► Cumulative translation differences: ► The entity can choose to record all existing cumulative translation differences for foreign operations at a value of zero

at the transition date.

► Investments in subsidiaries, jointly controlled entities and associates: ► The entity can choose to measure investments reported on separate financial statements at deemed cost. Deemed

cost is either the fair value at the date of transition to IFRS or the previous GAAP carrying amount at the date of transition.

► Assets and liabilities of subsidiaries, associates and joint ventures: ► If a subsidiary becomes a first-time adopter after its parent, then the assets and liabilities of the subsidiary should be

measured at either the carrying amounts that would be included in the parent’s financial statements, based on the parent’s date of transition, or the carrying amounts that would be required based on the subsidiary’s date of transition.

► If a parent becomes a first-time adopter after its subsidiary, then the parent should measure the assets and liabilities of the subsidiary in the consolidated statements at the same carrying amounts as in the financial statements of the subsidiary, after adjusting for consolidation and equity accounting adjustments, as well as the effects of the business combinations in which the parent acquired the subsidiary.

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Adoption of IFRS

Example 6 – Assets and liabilities of subsidiaries

Vacations Inc. (VI) plans to adopt IFRS in its consolidated financial statements for the first time in 2014 (date of transition, January 1, 2012), and its subsidiary, X Resorts (X), adopted IFRS in 2005. VI and X both account for their PP&E at historical cost under IAS 16. VI plans on electing to use the fair value of their PP&E as deemed cost at the transition.► How should VI report its PP&E in its consolidated

statements upon first-time adoption?



Adoption of IFRS

Example 6 solution:

Upon first-time adoption, VI may only adjust the carrying amounts of X’s assets and liabilities for the effects of consolidation and business combination for its purchase of X. Although VI elected to use the “fair value or revaluation as deemed cost” exemption to value PP&E upon its transition to IFRS on January 1, 2012, it cannot apply that exemption to X’s PP&E at VI’s date of transition to IFRS.



Adoption of IFRS


► Compound financial instruments: ► If the entity has a compound financial instrument that would have been bifurcated into a liability and an equity

component under IFRS, and if the liability component is no longer outstanding, then the entity does not need to separate these two components at the date of transition.

► Designation of previously recognized financial instruments: ► An entity may elect the fair value option for financial assets and liabilities as of the transition date to IFRS as

long as the instruments meet the criteria for the fair value option. Also, the entity may elect to measure an equity instrument at fair value through other comprehensive income (as long as it is not held for trading) as of the IFRS transition date.

► Fair value measurement of financial assets or financial liabilities at initial recognition: ► The entity may apply the valuation techniques within the international standards prospectively to transactions

entered into after January 1, : The IASB has adopted an amendment to IFRS 1, which replaces the date of January 1, 2004 with the date of transition to IFRS. This amendment is effective for annual periods beginning on or after July 1, 2011. Early adoption is permitted.

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Adoption of IFRS


► Decommissioning liabilities included in the cost of PP&E: ► An entity is not required to follow IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar

Liabilities, retrospectively in determining the carrying amount of assets to which the decommissioning liabilities relate. IFRIC 1 requires that changes in the liability should be added or deducted from the cost of the related asset and then depreciated prospectively over the remaining life of the asset.

► Business combinations: ► The entity may choose not to restate the accounting under previous GAAP for business combinations that

occurred before the transition date to IFRS. But, if a first-time adopter elects to restate any pre-transition-date business combination, it must restate all subsequent business combinations. For example, if a company elects to restate a business combination that took place in 2009, it must restate all business combinations from 2009 forward.

► Allowance of transitional provisions: ► An entity can choose to apply certain transitional provisions included in IFRS. These include the transitional

provisions in IFRS 4, Insurance Contracts, IFRIC 12, Service Concession Arrangements, IAS 23, Borrowing Costs, IFRIC 18, Transfer of Assets from Customers, and IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments.


Adoption of IFRS

Presentation and disclosure

► Certain comparative financial statements are required. The first-time financial statements should include:► Three statements of financial position.► Two statements of comprehensive income and two statements of net income, if presented

separately.► Two statements of cash flows.► Two statements of changes in equity.► Related notes.


Adoption of IFRS

Presentation and disclosure

► Certain reconciliations are required as follows:► A reconciliation of equity from the amount reported under the previous GAAP to the amount reported under IFRS.

This reconciliation is required at both the date of transition to IFRS as well as the end of the latest annual period that was presented under the previous GAAP.

► A reconciliation of comprehensive income from the amount reported under the previous GAAP to the amount reported under IFRS. This reconciliation is required for the latest annual period that was presented under the previous GAAP.

► The entity must provide a discussion of the effect of the transition from the previous GAAP to IFRS on its reported financial position, financial performance and cash flows.

► If an entity provides historical summaries of selected data for periods that precede the first period that they present comparative information under IFRS, then these summaries do not need to be presented under IFRS. However, the entity must clearly label these summaries as non-IFRS. The entity must also disclose the nature, but not a quantitative assessment, of the adjustments that would make these numbers comply with IFRS.

► All disclosures that are required under all other IFRS standards are required in the first-time IFRS statements.

ifrs 1 - adoption of ifrs. academic resource center adoption of ifrs page 2 executive summary ►...

Documents

previous financial statements

files financial statements

firsttime adoptions

set of annual statements

use of ifrs standards

relevant ifrs standards

semiannual interim statements

explicit statement