First-Time Adoption of IFRS

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Adoption of IFRS
Executive summary
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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.
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Primary pronouncements
US GAAP
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Not applicable.
IFRS
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IFRS 1, First-time Adoption of International
Financial Reporting Standards
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Objectives of the first-time adoption standard
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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.
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Scope
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What constitutes a first-time adoption?
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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.
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Recognition and measurement
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The opening statement of financial position should be presented using the
same accounting policies that are used for all periods presented in the firsttime 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.
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Recognition and measurement
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. Assume the IASB published a new standard on revenue
recognition in 2011, with an effective date of January 1, 2013.
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Should SUI report under the new revenue recognition
standard for all periods presented?
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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?
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Recognition and measurement
Example 1 solution:
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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:
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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.
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Recognition and measurement
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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.
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Recognition and measurement
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
iin 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.
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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)?
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Recognition and measurement
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
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Exceptions to the retrospective measurement
Mandatory exceptions
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Derecognition of financial assets and financial liabilities:
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Hedge accounting:
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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.
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.
Non-controlling interests:
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Various requirements related to the accounting for non-controlling interests are to be
applied prospectively, including the attribution of total comprehensive income to the owners
of the parent and non-controlling interests and the accounting for changes in parent
ownership.
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Exceptions to the retrospective measurement
Mandatory exceptions
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Classification and measurement of financial assets:
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The entity should assess the conditions specified in IFRS 9.4.1.2 under which a financial
asset should be measured at amortized cost as of the date the entity transitions to IFRS.
Embedded derivatives:
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As required by IFRS 9, B4.3.11, the entity should assess whether an embedded derivative
should be separated from the host contract based on conditions that existed at the later of:
► When it first became a party to the contract.
► When a significant modification to the contract occurs.
This amendment is effective for annual periods beginning on or after January 1, 2013.
Early adoption is permitted.
Note that IFRS 9 is effective for annual periods beginning on or after January 1, 2015 with early adoption
permitted.
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Exceptions to the retrospective measurement
Mandatory exceptions
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Estimates:
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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.
Government loans:
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On the date of transition to IFRS all government loans received shall be classified as a
liability or an equity instrument. This amendment is effective for annual periods beginning
on or after January 1, 2013. Early adoption is permitted.
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Exceptions to the retrospective measurement
Mandatory exceptions
Example 3 – Estimates
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.
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What amounts should be included in the comparative balance
sheets for the warranty liability as of January 1, 2011?
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Exceptions to the retrospective measurement
Mandatory exceptions
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.
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Exceptions to the retrospective measurement
Voluntary exceptions
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Share-based payments:
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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:
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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.
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Exceptions to the retrospective measurement
Voluntary exceptions
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
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.
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How should Oasis report this building in its first set of IFRS financial
statements?
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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?
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Exceptions to the retrospective measurement
Voluntary exceptions
Example 4 solution:
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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.
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Exceptions to the retrospective measurement
Voluntary exceptions
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Leases:
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Severe hyperinflation:
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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.
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.
Cumulative translation differences:
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The entity can choose to record all existing cumulative translation differences for foreign
operations at a value of zero at the transition date.
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Exceptions to the retrospective measurement
Voluntary exceptions
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Investments in subsidiaries, jointly controlled entities and associates:
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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:
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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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Exceptions to the retrospective measurement
Voluntary exceptions
Example 5 – 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.
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How should VI report its PP&E in its consolidated
statements upon first-time adoption?
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Exceptions to the retrospective measurement
Voluntary exceptions
Example 5 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.
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Exceptions to the retrospective measurement
Voluntary exceptions
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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
Fair value measurement of financial assets or financial liabilities at initial recognition:
► The entity may apply the initial measurement requirements of IFRS 9 B5.1.2A (b) to financial
instruments from the date of the initial adoption of IFRS forward.
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Note that IFRS 9 is effective for annual periods on or after January 1, 2015. Early adoption is permitted.
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.
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Exceptions to the retrospective measurement
Voluntary exceptions
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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 pretransition-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.
Other 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, IFRIC 19, Extinguishing
Financial Liabilities with Equity Instruments and IFRS 11Joint Arrangements (with an exception
related to changing from proportionate consolidation).
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Presentation and disclosure
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Certain comparative financial statements are required. The first-time financial
statements should include:
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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.
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Presentation and disclosure
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Certain reconciliations are required as follows:
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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.
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