and the interest rate swap was settled for its then negative fair value of €1.5m. Under its previous GAAP,
Entity C’s stated accounting policy in respect of terminated hedges was to defer any gain or loss on the
hedging instrument as a liability or an asset where the hedged exposure remained and this gain or loss was
recognised in profit or loss at the same time as the hedged exposure. At the end of December 2017 the
unamortised loss recognised as an asset in Entity C’s statement of financial position was €1.4m. The
cumulative change through April 2017 in the fair value of the loan attributable to changes in 3 month LIBOR
that had not been recognised was €1.6m.
In its opening IFRS statement of financial position Entity C should:
• remove the deferred loss asset of €1.4m from the statement of financial position; and
• reduce the carrying amount of the loan by €1.4m (the lower of the change in its fair value attributable to
the hedged risk, €1.6m, and the change in value of the interest rate swap that was deferred in the
statement of financial position, €1.4m).
The €1.4m adjustment to the loan would be amortised to profit or loss over its remaining term.
Case 4: Documentation completed after the date of transition
The facts are as in Case 2 above except that, at the date of transition, Entity C had not prepared documentation
that would allow it to apply hedge accounting under IFRS 9. Hedge documentation was subsequently
prepared as a result of which the hedge qualified for hedge accounting with effect from the beginning of
July 2018 and through 2019.
As in Case 2, in its opening IFRS statement of financial position Entity C should:
• recognise the interest rate swap as a liability at its fair value of €1m; and
• reduce the carrying amount of the loan by €1m (the lower of the change in its fair value attributable to
the hedged risk, €1.1m, and that of the interest rate swap, €1m), because the loan was clearly identified
as a hedged item.
For the period from January 2018 to June 2018, hedge accounting would not be available. Accordingly,
the interest rate swap would be remeasured to its fair value and any gain or loss would be recognised in
profit or loss with no offset from remeasuring the loan. With effect from July 2018 hedge accounting
would be applied prospectively.
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4.8 Non-controlling
interests
A first-time adopter must apply IFRS 10 retrospectively, except for the following
requirements that apply prospectively from its date of transition to IFRSs: [IFRS 1.B7]
(a) the requirement that total comprehensive income is attributed to the owners of
the parent and to the non-controlling interests even if this results in the non-
controlling interests having a deficit balance; [IFRS 10.B94]
(b) the requirements on accounting for changes in the parent’s ownership interest in a
subsidiary that do not result in a loss of control; [IFRS 10.23, B96] and
(c) the requirements on accounting for a loss of control over a subsidiary, and the
related requirements in IFRS 5 – Non-current Assets Held for Sale and
Discontinued Operations – to classify all assets and liabilities of that subsidiary as
held for sale. [IFRS 10.B97-B99, IFRS 5.8A].
However, if a first-time adopter restates any business combination that occurred prior
to its date of transition to comply with IFRS 3 – Business Combinations – it must also
apply IFRS 10, including these requirements, from that date onwards (see 5.2.2 below).
[IFRS 1.C1].
4.9
Classification and measurement of financial instruments under
IFRS 9
IFRS 9 requires a financial asset to be measured at amortised cost if it meets two tests
that deal with the nature of the business that holds the assets and the nature of the cash
flows arising on those assets. [IFRS 9.4.1.2]. Also, the standard requires a financial asset to
be measured at fair value through other comprehensive income if certain conditions are
met. [IFRS 9.4.1.2A]. These are described in detail in Chapter 44. Paragraph B8 of IFRS 1
requires a first-time adopter to assess whether a financial asset meets the conditions on
the basis of the facts and circumstances that exist at the date of transition to IFRSs.
If it is impracticable to assess a modified time value of money element under paragraphs
B4.1.9B-B4.1.9D of IFRS 9 on the basis of the facts and circumstances that exist at the
transition date, the first-time adopter should assess the contractual cash flow
characteristics of that financial asset on the basis of the facts and circumstances that
existed at that date without taking into account the requirements related to the
modification of the time value of money element in paragraphs B4.1.9B-B4.1.9D of
IFRS 9. [IFRS 1.B8A]. Similarly, if it is impracticable to assess whether the fair value of a
prepayment feature is insignificant under B4.1.12(c) of IFRS 9 on the basis of the facts
and circumstances that exist at the transition date, paragraphs B8B of IFRS 1 require an
entity to assess the contractual cash flow characteristics of that financial asset on the
basis of the facts and circumstances that existed at that date without taking into account
the exception for prepayment features in B4.1.12 of IFRS 9. These are discussed in more
detail in Chapter 44 at 10.2.3.
Paragraph B8C of IFRS 1 states that if it is impracticable (as defined in IAS 8) for an
entity to apply retrospectively the effective interest method in IFRS 9, the fair value of
the financial asset or the financial liability at the date of transition to IFRSs should be
the new gross carrying amount of that financial asset or the new amortised cost of that
financial liability at the date of transition to IFRSs.
First-time
adoption
247
4.10 Impairment of financial instruments under IFRS 9
Paragraph B8D of IFRS 1 requires a first-time adopter to apply the impairment
requirements in section 5.5 of IFRS 9 retrospectively subject to paragraphs 7.2.15 and
7.2.18-7.2.20 of IFRS 9 (see Chapter 50 at 5).
At the date of transition to IFRSs, paragraph B8E of IFRS 1 requires a first-time adopter to
use reasonable and supportable information that is available without undue cost or effort to
determine the credit risk at the date that the financial instruments were initially recognised
(or for loan commitments and financial guarantee contracts the date that the entity became
a party to the irrevocable commitment in accordance with paragraph 5.5.6 of IFRS 9) and
compare that to the credit risk at the date of transition to IFRSs. [IFRS 9.B7.2.2-B7.2.3].
A first-time adopter may apply the guidance in paragraph B8F of IFRS 1 to determine
whether there has been a significant increase in credit risk since initial recognition.
However, a first-time adopter would not be required to make that assessment if that
would require undue cost or effort. Paragraph B8G of IFRS 1 requires such a first-time
adopter to recognise a loss allowance at an amount equal to lifetime expected credit
losses at each reporting date until that financial instrument is derecognised (unless that
financial asset is low credit risk at a reporting date).
4.11 Embedded
derivatives
&nbs
p; When IFRS 9 requires an entity to separate an embedded derivative from a host
contract, the initial carrying amounts of the components at the date the instrument first
satisfied the recognition criteria in IFRS 9 should reflect circumstances that existed at
that date. If the initial carrying amounts of the embedded derivative and host contract
cannot be determined reliably, the entire combined contract should be designated at
fair value through profit or loss (IFRS 1.IG55).
Paragraph B9 of IFRS 1 requires a first-time adopter to assess whether an embedded
derivative should be separated from the host contract and accounted for as a derivative
based on conditions that existed at the later of the date it first became a party to the
contract and the date a reassessment is required by IFRS 9. [IFRS 9.B4.3.11]. It should be
noted that IFRS 9 does not permit embedded derivatives to be separated from host
contracts that are financial assets.
4.12 Government
loans
It is common practice in certain developing countries for the government to grant loans
to entities at below-market interest rates in order to promote economic development. A
first-time adopter may not have recognised and measured such loans in its previous GAAP
financial statements on a basis that complies with IFRSs. IAS 20 – Accounting for
Government Grants and Disclosure of Government Assistance – requires such loans to
be recognised at fair value with the effect of the below-market interest rate separately
accounted for as a government grant. [IAS 20.10A]. The IASB has provided transition relief
to first-time adopters in the form of an exception that requires government loans received
to be classified as a financial liability or an equity instrument in accordance with IAS 32 –
Financial Instruments: Presentation – and to apply the requirements in IFRS 9 and IAS 20
prospectively to government loans existing at the date of transition to IFRSs. Therefore a
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first-time adopter will not recognise the corresponding benefit of the government loan at
a below-market rate of interest as a government grant. A first-time adopter that did not,
under its previous GAAP, recognise and measure a government loan at a below-market
rate of interest on a basis consistent with IFRS requirements will use its previous GAAP
carrying amount of the loan at the date of transition as the carrying amount of the loan in
the opening IFRS statement of financial position and apply IFRS 9 to the measurement of
such loans after the date of transition to IFRSs. [IFRS 1.B10].
Alternatively, an entity may apply the requirements in IFRS
9 and IAS
20
retrospectively to any government loan originated before the date of transition,
provided the information needed to do so had been obtained when it first accounted
for the loan under previous GAAP. [IFRS 1.B11].
The requirements and guidance above do not preclude an entity from designating
previously recognised financial instruments at fair value through profit or loss (see 5.11.2
below). [IFRS 1.B12].
The requirements that a government loan with a below-market interest rate is not
restated from its previous GAAP amount are illustrated in the following example:
Example 5.12: Government loan with below-market interest rate
A government provides loans at a below-market rate of interest to fund the purchase of manufacturing equipment.
Entity S’s date of transition to IFRSs is 1 January 2018.
In 2015 Entity S received a loan of CU 100,000 at a below-market rate of interest from the government.
Under its previous GAAP, Entity S accounted for the loan as equity and the carrying amount was CU 100,000
at the date of transition. The amount repayable at 1 January 2021 will be CU 103,030.
No other payment is required under the terms of the loan and there are no future performance conditions
attached to it. The information needed to measure the fair value of the loan was not obtained at the time it
was initially accounted for.
The loan meets the definition of a financial liability in accordance with IAS 32. Entity S therefore reclassifies
it from equity to liability. It also uses the previous GAAP carrying amount of the loan at the date of transition
as the carrying amount of the loan in the opening IFRS statement of financial position. It calculates the
effective interest rate starting 1 January 2018 at 1%. The opening balance of CU 100,000 will accrete to
CU 103,030 at 31 December 2020 and interest of CU 1,000, CU 1,010 and CU 1,020 will be charged to
interest expense in each of the three years ended 31 December 2018, 2019 and 2020.
5
OPTIONAL EXEMPTIONS FROM THE REQUIREMENTS OF
CERTAIN IFRSs
5.1 Introduction
As noted at 3.5 above, 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. [IFRS 1.12(b)]. Each of these exemptions is explained in detail below.
5.2
Business combinations and acquisitions of associates and joint
arrangements
The business combinations exemption in IFRS 1 is probably the single most important
exemption in the standard, as it permits a first-time adopter not to restate business
First-time
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249
combinations that occurred prior to its date of transition to IFRSs. The detailed
guidance on the application of the business combinations exemption is contained in
Appendix C to IFRS 1 and is organised in the sections as follows: [IFRS 1 Appendix C]
• option to restate business combinations retrospectively (see 5.2.2 below);
• classification of business combinations (see 5.2.3 below);
• recognition and measurement of assets and liabilities (see 5.2.4 below);
• restatement of goodwill (see 5.2.5 below);
• currency adjustments to goodwill (see 5.2.6 below);
• previously unconsolidated subsidiaries (see 5.2.7 below);
• previously consolidated entities that are not subsidiaries (see 5.2.8 below);
• measurement of deferred taxes and non-controlling interests (see 5.2.9 below); and
• transition accounting for contingent consideration (see 5.2.10 below).
The business combinations exemption applies only to business combinations that
occurred before the date of transition to IFRSs and only to the acquisition of businesses
as defined under IFRS 3 (see 5.2.1 below). [IFRS 1 Appendix C]. Therefore, it does not apply to
a transaction that, for example, IFRSs treat as an acquisition of an asset (see 5.2.1.A below).
5.2.1
Definition of a ‘business’ under IFRS 3
As noted above, the business combination exemption applies only to the acquisition of a
business as defined under IFRS 3. Therefore, a first-time adopter needs to consider
whether past transactions would qualify as business combinations under IFRS 3. That
standard defines a business combination as ‘a transaction or other event in which an
acquirer obtains control of one or more businesses. Transactions sometimes referred to as
“true mergers” or “mergers of equals” are also business combinations as that term is used
in this IFRS.’ [IFRS 3 Appendix A]. A business is defined as ‘an
integrated set of activities and
assets that is capable of being conducted and managed for the purpose of providing a return
in the form of dividends, lower costs or other economic benefits directly to investors or
other owners, members or participants.’ [IFRS 3 Appendix A]. In addition, IFRS 3 states that ‘if
the assets acquired are not a business, the reporting entity shall account for the transaction
or other event as an asset acquisition’ (see 5.2.1.A below). [IFRS 3.3]. Distinguishing a business
combination from an asset acquisition is described in detail in Chapter 9.
In October 2012, the IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12
and IAS 27) (see 5.9.5 below). Amongst other changes, the amendment also makes it
clear that Appendix C of IFRS 1, which deals with the business combinations
exemption, should be applied only to business combinations within the scope of IFRS 3.
This means that the exemption does not apply to mergers of entities that are not
business combinations under IFRS 3. So a first-time adopter which had such mergers
under previous GAAP should retrospectively apply IFRS applicable to those mergers. If
the mergers are those of entities under common control, as there is no specific guidance
under IFRS on accounting for them, we discuss this issue in Chapter 10.
5.2.1.A Asset
acquisitions
Because IFRS 3 provides such a specific definition of a business combination (as
described in Chapter 9), it is possible that under some national GAAPs, transactions that
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are not business combinations under IFRS 3, e.g. asset acquisitions, may have been
accounted for as if they were business combinations. If so, a first-time adopter will need
to restate such transactions, as discussed in the following example.
Example 5.13: Acquisition of assets
Entity A acquired a company that held a single asset at the time of acquisition. That company had no
employees and the asset itself was not in use at the date of acquisition. Entity A accounted for the transaction
under its previous GAAP using the purchase method, which resulted in goodwill. Can Entity A apply the
business combinations exemption to the acquisition of this asset?
If Entity A concludes that the asset is not a business as defined in IFRS 3, it will not be able to apply the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 50
