International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 47
• estimates (see 4.2 below);
• derecognition of financial assets and financial liabilities (see 4.3 below);
• hedge accounting (see 4.4 to 4.7 below);
• non-controlling interests (see 4.8 below);
• classification and measurement of financial assets (see 4.9 below);
• impairment of financial assets (see 4.10 below)
• embedded derivatives (see 4.11 below); and
• government loans (see 4.12 below).
The reasoning behind most of the exceptions is that retrospective application of IFRSs
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.
Optional exemptions: In addition to the mandatory exceptions, IFRS 1 grants limited
optional exemptions from the general requirement of full retrospective application of
the standards in force at the end of an entity’s first IFRS reporting period, considering
the fact that the cost of complying with them would be likely to exceed the benefits
to users of financial statements. [IFRS 1.IN5]. The standard provides exemptions in
relation to: [IFRS 1 Appendix C, D1]
• business combinations (see 5.2 below);
• share-based payment transactions (see 5.3 below);
• insurance contracts (see 5.4 below);
• deemed cost (see 5.5 below);
• leases (see 5.6 below);
• cumulative translation differences (see 5.7 below);
• investments in subsidiaries, joint ventures and associates (see 5.8 below);
• assets and liabilities of subsidiaries, associates and joint ventures (see 5.9 below);
• compound financial instruments (see 5.10 below);
• designation of previously recognised financial instruments (see 5.11 below);
• designation of contracts to buy or sell a non-financial item (see 5.11.5 below);
First-time
adoption
231
• fair value measurement of financial assets or financial liabilities at initial
recognition (see 5.12 below);
• decommissioning liabilities included in the cost of property, plant and equipment
(see 5.13 below);
• financial assets or intangible assets accounted for in accordance with IFRIC 12 –
Service Concession Arrangements (see 5.14 below);
• borrowing costs (see 5.15 below);
• extinguishing financial liabilities with equity instruments (see 5.16 below);
• severe hyperinflation (see 5.17 below);
• joint arrangements (see 5.18 below);
• stripping costs in the production phase of a surface mine (see 5.19 below);
• regulatory deferral account (see 5.20 below);
• revenue from contracts with customers (see 5.21 below); and
• foreign currency transactions and advance consideration (see 5.22 below).
In addition to the above, IFRS 1 grants certain short-term exemptions from IFRS 9 –
Financial Instruments – and IFRIC 23 – Uncertainty over Income Tax Treatments,
which will only be applicable to a first-time adopter that presents its first IFRS financial
statements for the periods up to the dates specified in the exemption. These short-term
exemptions are contained in Appendix E to IFRS 1 (see 5.23 and 5.24 below).
It is specifically prohibited under IFRS 1 to apply exemptions by analogy to other items.
[IFRS 1.18].
Application of these exemptions is entirely optional, i.e. a first-time adopter can pick
and choose the exemptions that it wants to apply. Importantly, the IASB did not
establish a hierarchy of exemptions. Therefore, when an item is covered by more than
one exemption, a first-time adopter has a free choice in determining the order in which
it applies the exemptions.
Example 5.7:
Order of application of exemptions
Entity A acquired a building in a business combination. If Entity A were to apply the business
combinations exemption described at 5.2 below, it would at the date of transition recognise the building
at the acquisition date value net of subsequent depreciation and impairment of €120. However, if it were
to use the fair value as the deemed cost of the building it would have to recognise it at €150. Which value
should Entity A use?
A can choose whether it wants to recognise the building at €120 or €150 in its opening IFRS statement of
financial position. The fact that Entity A uses the business combinations exemption does not prohibit it from
also applying the ‘fair value as deemed cost’ exemption in relation to the same assets. Also, Entity A is not
required to apply the ‘fair value as deemed cost’ exemption to all assets or to all similar assets as entities can
choose to which assets they want to apply this exemption (see 5.5 below).
232 Chapter
5
4
EXCEPTIONS TO RETROSPECTIVE APPLICATION OF
OTHER IFRSs
4.1 Introduction
IFRS 1 provides a number of mandatory exceptions that specifically prohibit
retrospective application of some aspects of other IFRSs as listed in 3.5 above. Each of
the exceptions is explained in detail below.
4.2 Estimates
IFRS 1 requires an entity to use estimates under IFRSs that are consistent with the
estimates made for the same date under its previous GAAP – after adjusting for any
difference in accounting policy – unless there is objective evidence that those estimates
were in error in accordance with IAS 8. [IFRS 1.14, IAS 8.5].
Under IFRS 1, an entity cannot apply hindsight and make ‘better’ estimates when it
prepares its first IFRS financial statements. This also means that an entity is not allowed
to consider subsequent events that provide evidence of conditions that existed at that
date, but that came to light after the date its previous GAAP financial statements were
finalised. If an estimate made under previous GAAP requires adjustment because of new
information after the relevant date, an entity treats this information in the same way as
a non-adjusting event after the reporting period under IAS 10 – Events after the
Reporting Period. Effectively, the IASB wishes to prevent entities from using hindsight
to ‘clean up’ their balance sheets as part of the preparation of the opening IFRS
statement of financial position. In addition, the exception also ensures that a first-time
adopter need not conduct a search for, and change the accounting for, events that might
have otherwise qualified as adjusting events.
IFRS 1 provides the following guidance on estimates:
• When previous GAAP required estimates of similar items for the date of transition
to IFRSs, an entity can be in one of the following two positions: [IFRS 1.IG3]
• its previous GAAP accounting policy was consistent with IFRSs, in which case
the estimates under IFRS need to be consistent with those made for that date
under previous GAAP, unless there is objective evidence that those estimates
were in error under IAS 8; [IAS 8.5] or
• its previous GAAP accounting policy was not consistent with IFRSs, in which
case, it adjusts the estimate only for the difference in accounting policies
(unless there is objective evidence that those estimates were in error).
In both situations, it accounts for the revisions to those estimate
s in the period in
which it makes the revisions in the same way as a non-adjusting event after the
reporting period under IAS 10. [IFRS 1.15, IG3, IAS 10.10].
• When an entity needs to make estimates under IFRSs at the transition date that
were not required under its previous GAAP, those estimates should reflect
conditions that existed at that date. This is consistent with the distinction in IAS 10
between adjusting events and non-adjusting events after the reporting period. In
particular, estimates of market prices, interest rates or foreign exchange rates
should reflect market conditions at that date. [IFRS 1.16, IG3]. Entities that are
First-time
adoption
233
preparing for transition to IFRSs should consider gathering the data necessary for
the estimate at the transition date to make the transition easier and to ensure that
hindsight is not incorporated into the estimate;
The requirements above apply both to estimates made in respect of the date of
transition to IFRSs and to those in respect of any of the comparative periods, in which
case the reference to the date of transition to IFRSs above are replaced by references
to the end of that comparative period. [IFRS 1.17].
The flowchart below shows the decision-making process that an entity needs to apply
in dealing with estimates at the transition date and during any of the comparative
periods included in its first IFRS financial statements.
Did the entity make an
estimate under its
No
previous GAAP?
Yes
Is there objective
Make estimate
evidence that the
Yes
reflecting conditions at
estimate was in error?
the relevant date *)
No
Did the entity use
Use previous
accounting policies
Yes
GAAP estimate
consistent with IFRS?
No
Adjust previous estimate
to reflect difference in
accounting policies
*) the relevant date is the date to which the estimate relates
The general prohibition in IFRS 1 on the use of hindsight in making estimates about past
transactions does not override the requirements in other IFRSs that base classifications
or measurements on circumstances existing at a particular date, e.g. the distinction
between finance leases and operating leases for a lessor. [IFRS 1.IG4].
IFRS 1 requires an entity that is unable to determine whether a particular portion of an
adjustment is a transitional adjustment or a change in estimate to treat that portion as a
change in accounting estimate under IAS 8, with appropriate disclosures as required by
IAS 8. [IFRS 1.IG58B, IAS 8.32-40]. The distinction between changes in accounting policies and
changes in accounting estimates is discussed in detail in Chapter 3.
If a first-time adopter concludes that estimates under previous GAAP were made in
error, it should distinguish the correction of those errors from changes in accounting
policies in its reconciliations from previous GAAP to IFRSs (see 6.3.1 below). [IFRS 1.26].
234 Chapter
5
The example below illustrates how an entity should deal with estimates on the transition date
and in comparative periods included in its first IFRS financial statements. [IFRS 1.IG Example 1].
Example 5.8:
Application of IFRS 1 to estimates
Entity A’s first IFRS financial statements have a reporting date of 31 December 2019 and include
comparative information for one year. In its previous GAAP financial statements for 31 December 2018,
Entity A accounted for its pension plan on a cash basis. However, under IAS 19 – Employee Benefits – the
plan is classified as a defined benefit plan and actuarial estimates are required.
Entity A will need to make estimates under IFRSs at the relevant date that reflect conditions that existed at
the relevant date. This means, for example, that Entity A’s:
• discount rates at 1 January 2018 (date of transition) and 31 December 2018 for the pension plan should
reflect market conditions at those dates; and
• actuarial assumptions at 1 January 2018 and 31 December 2018 about future employee turnover rates
should not reflect conditions that arose after those dates – such as a significant increase in estimated
employee turnover rates as a result of a redundancy plan in 2019.
Entity B accounted for inventories at the lower of cost and net realisable value under its previous GAAP.
Entity B’s accounting policy is consistent with the requirements of IAS 2 – Inventories. Under previous
GAAP, the goods were accounted for at a price of £1.25/kg. Due to changes in market circumstances, Entity B
ultimately could only sell the goods in the following period for £0.90/kg.
Assuming that Entity B’s estimate of the net realisable value was not in error, it will account for the goods at
£1.25/kg upon transition to IFRSs and will make no adjustments because the estimate was not in error and its
accounting policy was consistent with IFRSs. The effect of selling the goods for £0.90/kg will be reflected in
the period in which they were sold.
Entity C’s first IFRS financial statements have a reporting date of 31 December 2019 and include comparative
information for one year. In its previous GAAP financial statements for 31 December 2017, Entity C accounted
for a provision of $150,000 in connection with a court case. Entity C’s accounting policy was consistent with
the requirements of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, except for the fact that
Entity C did not discount the provision for the time value of money. The discounted value of the provision at
31 December 2017 would have been $135,000. The case was settled for $190,000 during 2018.
In its opening IFRS statement of financial position at 1 January 2018, Entity C will measure the provision at
$135,000. IFRS 1 does not permit an entity to adjust the estimate itself, unless it was in error, but does require
an adjustment to reflect the difference in accounting policies. The unwinding of the discount and the
adjustment due to the under-provision will be included in the comparative statement of profit and loss and
other comprehensive income for 2018.
Entity D’s first IFRS financial statements have a reporting date of 31 December 2019 and include
comparative information for one year. In its previous GAAP financial statements for 31 December 2018,
Entity D did not recognise a provision for a court case arising from events that occurred in September 2018.
When the court case was concluded on 30 June 2019, Entity D was required to pay €1,000,000 and paid this
on 10 July 2019.
In preparing its comparative statement of financial position at 31 December 2018, the treatment of the court
case at that date depends on the reason why Entity D did not recognise a provision under its previous GAAP
at that date.
Scenario 1 – Previous GAAP was consistent with IAS 37. At the date of preparing its 2018 financial
statements, Entity D concluded that the recognition criteria were not met. In this case, Entity D’s assumptions
under IFRSs are to be consistent with its assumptions under previous GAAP. Therefore, Entity D does not
recognise a provisi
on at 31 December 2018 and the effect of settling the court case is reflected in the 2019
statement of profit or loss and other comprehensive income.
Scenario 2 – Previous GAAP was not consistent with IAS 37. Therefore, Entity D develops estimates under
IAS 37, which requires that an entity determines whether a present obligation exists at the end of the reporting
period by taking account of all available evidence, including any additional evidence provided by events after the
First-time
adoption
235
end of the reporting period. Similarly, under IAS 10, the resolution of a court case after the end of the reporting
period is an adjusting event if it confirms that the entity had a present obligation at that date. In this instance, the
resolution of the court case confirms that Entity D had a liability in September 2018 (when the events occurred
that gave rise to the court case). Therefore, Entity D recognises a provision at 31 December 2018. Entity D
measures that provision by discounting the €1,000,000 paid on 10 July 2019 to its present value, using a discount
rate that complies with IAS 37 and reflects market conditions at 31 December 2018.
Some of the potential consequences of applying IAS 37 resulting in changes in the way
an entity accounts for provisions are addressed at 7.13 below.
4.3
Derecognition of financial assets and financial liabilities
IFRS 1 requires a first-time adopter to apply the derecognition requirements in IFRS 9
prospectively to transactions occurring on or after the date of transition to IFRSs but
need not apply them retrospectively to transactions that had already been derecognised.
For example, if a first-time adopter derecognised non-derivative financial assets or non-
derivative financial liabilities under its previous GAAP as a result of a transaction that
occurred before the date of transition to IFRSs, the entity shall not recognise those
assets or liabilities under IFRSs unless they qualify for recognition as a result of a later
transaction or event. [IFRS 1.B2]. However, a first-time adopter may apply the
derecognition requirements in IFRS 9 retrospectively from a date of the entity’s
choosing, provided that the information needed to apply IFRS 9 to financial assets and
financial liabilities derecognised as a result of past transactions was obtained at the time
of initially accounting for those transactions. [IFRS 1.B3]. This will effectively prevent most