International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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IFRSs there will often not be major changes required in its accounting policies to comply
with IFRSs. However, as discussed at 2.1 above, under IFRS 1 it is not relevant whether or
not a previous GAAP was very similar to IFRSs. Therefore, regardless of the absence of
significant differences in accounting policies, that entity would be a first-time adopter
when it includes an explicit and unreserved statement of compliance with IFRSs for the
first time. So, even if the entity’s accounting policies were already fully aligned with IFRSs:
(a) it would be permitted to apply the IFRS 1 exemptions and required to apply the
IFRS 1 exceptions;
(b) it would need to restate items for which the applicable first-time adoption
exceptions differ from the transitional rules applicable to ongoing reporters (e.g.
classification and measurement of financial assets);
(c) it would not be permitted to apply different versions of IFRSs that were effective
at earlier dates; and
(d) it would need to explain the transition to IFRSs.
Notwithstanding the above, we believe an entity that:
• reported under a national GAAP that is identical with IFRSs in all respects;
• applied the national GAAP equivalent of IFRS 1 when the entity adopted that
national GAAP;
• made an explicit and unreserved statement of compliance with that national GAAP
in its most recent financial statements; and
• could have made an explicit and unreserved statement of compliance with IFRSs
in those financial statements, if required,
does not have to re-apply IFRS 1 the first time that it makes an explicit and unreserved
statement of compliance with IFRSs.
For example, if an entity that meets the requirements described above decides to make
an explicit and unreserved statement of compliance with IFRSs for the first time, either
voluntarily or is required to do so by a regulatory requirement related to an IPO, the
entity would not be required to re-apply IFRS 1.
3
OPENING IFRS STATEMENT OF FINANCIAL POSITION
At the date of transition to IFRSs, an entity should prepare and present an opening IFRS
statement of financial position that is the starting point for its accounting under IFRSs. [IFRS 1.6].
The date of transition to IFRSs is the beginning of the earliest comparative period presented
in an entity’s first IFRS financial statements. [IFRS 1 Appendix A]. Therefore the date of transition
for an entity reporting under IFRSs for the first time at 31 December 2019 and presenting one
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year of comparative figures is 1 January 2018. For entities that adopt IFRSs at the beginning
of a year, it is recommended that they consider the filing requirements for interim financial
reports that a regulator in their jurisdiction may impose. For example, a regulator may require
the opening IFRS statement of financial position to be presented in the first IFRS interim
financial report even though this is not an IFRS 1 presentation requirement (see 6.6 below).
3.1
First-time adoption timeline
An entity’s first annual IFRS financial statements must include at least three statements of
financial position (i.e. balance sheets), two statements of profit or loss and other
comprehensive income, two separate statements of profit or loss (if presented), two
statements of cash flows and two statements of changes in equity and related notes for all
statements presented, including the comparative information. [IFRS 1.21]. The beginning of
the earliest comparative period for which the entity presents full comparative information
under IFRSs will be treated as its date of transition to IFRSs. The diagram below shows
how for an entity with a December year-end the above terms are related:
Last financial statements under ‘previous GAAP’
First IFRS
Comparative period
reporting period
First IFRS financial statements
31/12/2016
1/1/2018
1/1/2019
31/12/2019
Date of transition to IFRS
Beginning of the first IFRS
First IFRS
reporting period
reporting date
The diagram above also illustrates that there is a period of overlap, for the financial
year 2018, which is reported first under the entity’s previous GAAP and then as a
comparative period under IFRSs. The following example illustrates how an entity
should determine its date of transition to IFRSs.
Example 5.5:
Determining the date of transition to IFRSs
Entity A’s year-end is 31 December and it presents financial statements that include one comparative period.
Entity A is required (e.g. by national legislation) to produce IFRS financial statements for the first annual
accounting period starting on or after 1 January 2019.
A’s first IFRS financial statements are for the period ending on 31 December 2019. Its date of transition to IFRSs is
1 January 2018, which is the beginning of the single comparative period included in its first IFRS financial statements.
Entity B’s year-end is 31 July and it presents financial statements that include two comparative periods.
Entity B is required to produce IFRS financial statements for the first annual accounting period starting on or
after 1 January 2019.
B’s first IFRS financial statements are for the period ending on 31 July 2020. Its date of transition to IFRSs
is 1 August 2017, which is the beginning of the earliest period for which full comparative information is
included in its first IFRS financial statements.
Entity C’s most recent financial statements, under its previous GAAP, are for the period from 1 July 2017 to
31 December 2018. Entity C presents its first IFRS financial statements for the period ending 31 December 2019.
C’s date of transition is 1 July 2017. While paragraph 21 of IFRS 1 and paragraph 38 of IAS 1 require presentation
of at least one comparative period, IFRSs do not require the comparative period to be a 12-month period. Thus, the
First-time
adoption
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entity’s date of transition will be the beginning of the earliest comparative period, irrespective of the length of that
period. However, paragraph 36 of IAS 1 would require disclosure of the reason why the comparative period is not
12 months and disclosure of the fact that the periods presented are not entirely comparable.
Similarly, it is generally not considered to be a problem if the current or comparative period in an entity’s
first IFRS financial statements only covers a 52-week period, because IAS 1 does not preclude the practice
of presenting financial statements for 52-week financial periods. [IAS 1.37].
3.2
Opening IFRS statement of financial position and accounting
policies
The fundamental principle of IFRS 1 is to require full retrospective application of the
standards in force at the end of an entity’s first IFRS reporting period, but with limited
exceptions for the opening IFRS statement of financial position. IFRS 1 requires a first-time
adopter to use the same accounting policies in its opening IFRS statement of financial
position and for all periods presented in its first IFRS financial statements. However, this
may not be straightforward,
since to achieve this, the entity should comply with each IFRS
effective at the end of its first IFRS reporting period fully retrospectively, after taking into
account a number of allowed exemptions from certain IFRSs and mandatory exceptions to
retrospective application of other IFRSs in accordance with IFRS 1 (see 3.5 below). [IFRS 1.7].
The requirement to apply the same accounting policies to all periods also prohibits a
first-time adopter from applying previous versions of standards that were effective at
earlier dates. [IFRS 1.8]. As well as enhancing comparability, the IASB believes that this
gives users comparative information that is based on IFRSs that are superior to
superseded versions of those standards and avoids unnecessary costs. [IFRS 1.BC11].
For similar reasons, IFRS 1 also permits an entity to choose to apply either a current standard
or a new standard that is not yet mandatory if that standard allows early application. [IFRS 1.8].
Whichever standard is selected it would need to be applied consistently throughout the
periods presented in its first IFRS financial statements on a retrospective basis, unless IFRS 1
provides an exemption or an exception that permits or requires otherwise. [IFRS 1.BC11A]. The
diagram below summarises these requirements in IFRS 1.
Select IFRS accounting policies:
• use standards effective at the reporting date;
• determine which new standards to adopt
before their effective date;
• determine which exemptions to use;
• take into account the exceptions to
retrospective application.
Apply the same accounting policies to all periods
1/1/2018
31/12/2018
31/12/2019
Date of transition to IFRS
First IFRS
reporting date
Opening IFRS statement of financial position
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It should be noted that depending on the end of its first IFRS reporting period, an entity
may or may not have the option to choose which version of a particular standard it may
apply, as can be seen in the example below.
Example 5.6:
Prohibition from applying superseded standards
Entity A’s date of transition to IFRSs is 1 January 2018 and its first IFRS reporting period ends on
31 December 2019. How should Entity A apply the amendments to IAS 19 – Plan Amendment, Curtailment
or Settlement – Amendments to IAS 19, which are effective for annual periods beginning 1 January 2019, in
its first IFRS financial statements?
IFRS 1 requires Entity A to apply the amendments to IAS 19 because they are effective in its first IFRS
reporting period. Since IFRS 1 prohibits an entity from applying a superseded standard to transactions that
occurred before 1 January 2019 while applying the amended standard in the period beginning 1 January 2019,
Entity A has to apply the above-mentioned amendments to IAS 19 for all periods presented.
Unless the exceptions and exemptions at 3.5 below apply, in preparing its opening IFRS
statement of financial position, an entity should:
(a) recognise all assets and liabilities if recognition is required by IFRSs;
(b) not recognise assets or liabilities if IFRSs do not permit it;
(c) reclassify items recognised under previous GAAP as one type of asset, liability or
component of equity, but are a different type of asset, liability or component of
equity in accordance with IFRSs; and
(d) measure all recognised assets and liabilities by applying IFRSs. [IFRS 1.10].
Any change in accounting policies on adoption of IFRSs may cause changes in the
amounts recorded under previous GAAP in respect of events and transactions that
occurred before the date of transition. The effects of these changes should be
recognised at the date of transition to IFRSs in retained earnings or, if appropriate, in
another category of equity. [IFRS 1.11]. For example, an entity that applies the IAS 16 –
Property, Plant and Equipment – revaluation model (see Chapter 18) in its first IFRS
financial statements would recognise the difference between cost and the revalued
amount of property, plant and equipment in a revaluation reserve. By contrast, an
entity that had applied a revaluation model under its previous GAAP, but decided to
apply the cost model under IAS 16, would reallocate the revaluation reserve to
retained earnings or a separate component of equity not described as a revaluation
reserve (see 7.4.3 below).
A first-time adopter is under no obligation to ensure that its IFRS accounting policies
are similar to or as close as possible to its previous GAAP accounting policies.
Therefore, for example, a first-time adopter could adopt the IAS 16 revaluation model
despite the fact that it applied a cost model under its previous GAAP or vice versa.
However, a first-time adopter would need to take into account the guidance in IAS 8
to ensure that its choice of accounting policy results in information that is relevant
and reliable. [IAS 8.10-12].
The requirement to prepare an opening IFRS statement of financial position and ‘reset
the clock’ at that date poses a number of challenges for first-time adopters. Even a
first-time adopter that already applies a standard that is directly based on IFRSs may
decide to restate items in its opening IFRS statement of financial position (see 2.3.1
above). This happens, for example, in the case of an entity applying a property, plant
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and equipment standard that is based on IAS 16 before an entity’s date of transition to
IFRSs because the entity may decide to use a deemed cost exemption for certain of
its assets as allowed by IFRS 1.
3.3
Fair value and deemed cost
Some exemptions in IFRS 1 refer to ‘fair value’ and ‘deemed cost’, which the standard
defines as follows: [IFRS 1 Appendix A]
Deemed cost: is an amount used as a surrogate for cost or depreciated cost at a given
date. Subsequent depreciation or amortisation assumes that the entity had initially
recognised the asset or liability at the given date and that its cost was equal to the
deemed cost.
Fair value: is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date (see
Chapter 14 and IFRS 13 – Fair Value Measurement). The fair values determined by a
first-time adopter should reflect the conditions that existed at the date for which they
were determined, i.e. the first-time adopter should not apply hindsight in measuring the
fair value at an earlier date.
3.4
Transitional provisions in other standards
The transitional provisions in other standards only apply to entities that already report
under IFRSs. Therefore, a first-time adopter is not able to apply those transitional
provisions unless specified by the requirements in IFRS 1. [IFRS 1.9]. Exceptions to this
general rule are covered in the later parts of this Chapter that deal with the exceptions
to the retrospective application of other IFRSs (see 4 below) and the exemptions from
other IFRSs (see 5 below).
It is important to note that the transition rules for first-time ado
pters and entities that
already report under IFRSs may differ significantly.
The IASB considers ‘case by case when it issues a new IFRS 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 adopter’s 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 the IFRS on first-time adoption of IFRSs.’
[IFRS 1.BC14].
IAS 8 allows exceptions from retrospective application for entities that cannot apply a
requirement after making every reasonable effort to do so. There is no such relief in
IFRS 1. The Interpretations Committee agreed ‘that there were potential issues,
especially with respect to “old” items, such as property, plant and equipment. However,
those issues could usually be resolved by using one of the transition options available in
IFRS 1’ (see 3.5 below).3 For example, an entity could elect to use fair value as deemed
cost at the transition date if an entity is unable to apply IAS 36 – Impairment of Assets
– on a fully retrospective basis (see 7.12 below). Therefore no ‘impracticability relief’
was added to the standard for first-time adopters. The transition options usually involve
using certain surrogate values as deemed cost and are discussed at 5.5 below.
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3.5
Departures from full retrospective application
IFRS 1 establishes two types of departure from the principle of full retrospective
application of standards in force at the end of the first IFRS reporting period: [IFRS 1.12]
• it prohibits retrospective application of some aspects of other standards (the
‘mandatory exceptions’); and
• it grants a number of exemptions from some of the requirements of other standards
(‘optional exemptions’).
Mandatory exceptions: IFRS 1 prohibits retrospective application of IFRSs in some
areas, particularly where this would require judgements by management about past
conditions after the outcome of a particular transaction is already known. [IFRS 1.IN5]. The
mandatory exceptions in the standard cover the following situations:
[IFRS 1.13-17, Appendix B]