5.2.6
Currency adjustments to goodwill
A first-time adopter need not apply IAS 21 retrospectively to fair value adjustments and
goodwill arising in business combinations that occurred before the date of transition to
IFRSs. [IFRS 1.C2, IG21A]. This exemption is different from the ‘cumulative translation
differences’ exemption, which is discussed at 5.7 below.
IAS 21 requires any goodwill arising on the acquisition of a foreign operation and any
fair value adjustments to the carrying amounts of assets and liabilities arising on the
acquisition of that foreign operation to be treated as assets and liabilities of the foreign
operation. Thus they are expressed in the functional currency of the foreign operation
and are translated at the closing rate in accordance with the requirements discussed in
Chapter 15. [IAS 21.47]. For a first-time adopter it may be impracticable, especially after a
corporate restructuring, to determine retrospectively the currency in which goodwill
and fair value adjustments should be expressed. If IAS 21 is not applied retrospectively,
a first-time adopter should treat such fair value adjustments and goodwill as assets and
liabilities of the entity rather than as assets and liabilities of the acquiree. As a result,
those goodwill and fair value adjustments are either already expressed in the entity’s
functional currency or are non-monetary foreign currency items that are reported using
the exchange rate applied in accordance with previous GAAP. [IFRS 1.C2].
If a first-time adopter chooses not to take the exemption mentioned above, it must apply
IAS 21 retrospectively to fair value adjustments and goodwill arising in either: [IFRS 1.C1, C3]
(a) all business combinations that occurred before the date of transition to IFRSs; or
(b) all business combinations that the entity elects to restate to comply with IFRS 3.
In practice the exemption may be of limited use for a number of reasons:
First, the exemption permits ‘goodwill and fair value adjustments’ to be treated as assets
and liabilities of the entity rather than as assets and liabilities of the acquiree. Implicit in the
exemption is the requirement to treat both the goodwill and the fair value adjustments
consistently. However, the IASB apparently did not consider that many first-time adopters,
under their previous GAAP, will have treated fair value adjustments as assets or liabilities
of the acquiree, while at the same time treating goodwill as an asset of the acquirer. As the
exemption under IFRS 1 did not foresee this particular situation, those first-time adopters
will need to restate either their goodwill or fair value adjustments. In many cases
restatement of goodwill is less onerous than restatement of fair value adjustments.
First-time
adoption
265
Secondly, the paragraphs in IFRS 1 that introduce the exemption were drafted at a
later date than the rest of the Appendix of which they form part. Instead of referring
to ‘first-time adopter’ these paragraphs refer to ‘entity’. Nevertheless, it is clear from
the context that ‘entity’ should be read as ‘first-time adopter’. This means that the
exemption only permits goodwill and fair value adjustments to be treated as assets and
liabilities of the first-time adopter (i.e. ultimate parent). In practice, however, many
groups have treated goodwill and fair value adjustments as an asset and liabilities of
an intermediate parent. Where the intermediate parent has a functional currency that
is different from that of the ultimate parent or the acquiree, it will be necessary to
restate goodwill and fair value adjustments.
The decision to treat goodwill and fair value adjustments as either items
denominated in the parent’s or the acquiree’s functional currency will also affect the
extent to which the net investment in those foreign subsidiaries can be hedged (see
also 4.5.5 above).
5.2.7
Previously unconsolidated subsidiaries
Under its previous GAAP a first-time adopter may not have consolidated a subsidiary
acquired in a past business combination. In that case, a first-time adopter applying the
business combinations exemption should measure the carrying amounts of the
subsidiary’s assets and liabilities in its consolidated financial statements at the transition
date at either: [IFRS 1.IG27(a)]
(a) if the subsidiary has adopted IFRSs, the same carrying amounts as in the IFRS
financial statements of the subsidiary, after adjusting for consolidation procedures
and for the effects of the business combination in which it acquired the subsidiary;
[IFRS 1.D17] or
(b) if the subsidiary has not adopted IFRSs, the carrying amounts that IFRSs would
require in the subsidiary’s statement of financial position. [IFRS 1.C4(j)].
The deemed cost of goodwill is the difference at the date of transition between:
(i) the parent’s interest in those adjusted carrying amounts; and
(ii) the cost in the parent’s separate financial statements of its investment in the
subsidiary. [IFRS 1.C4(j)].
The cost of an investment in a subsidiary in the parent’s separate financial statements
will depend on which option the parent has taken to measure the cost under IFRS 1
(see 5.8.2 below).
A first-time adopter is precluded from calculating what the goodwill would have been
at the date of the original acquisition. The deemed cost of goodwill is capitalised in the
opening IFRS statement of financial position. The following example, which is based on
one within the guidance on implementation of IFRS 1, illustrates this requirement.
[IFRS 1.IG Example 6].
266 Chapter
5
Example 5.27: Subsidiary not consolidated under previous GAAP
Background
Entity A’s date of transition to IFRSs is 1 January 2018. Under its previous GAAP, Entity A did not
consolidate its 75 percent interest in Entity B, which it acquired in a business combination on 15 July 2015.
On 1 January 2018:
(a) the cost of Entity A’s investment in Entity B is $180; and
(b) under IFRSs, Entity B would measure its assets at $500 and its liabilities (including deferred tax under
IAS 12) at $300. On this basis, Entity B’s net assets are $200 under IFRSs.
Application of requirements
Entity A consolidates Entity B. The consolidated statement of financial position at 1 January 2018 includes:
(a) Entity B’s assets at $500 and liabilities at $300;
(b) non-controlling interests of $50 (25 per cent of [$500 – $300]); and
(c) goodwill of $30 (cost of $180 less 75 per cent of [$500 – $300]). Entity A tests the goodwill for
impairment under IAS 36 (see 7.12 below) and recognises any resulting impairment loss, based on
conditions that existed at the date of transition to IFRSs.
If the cost of the subsidiary (as measured under IFRS 1, see 5.8.2 below) is lower than
the proportionate share of net asset value at the date of transition to IFRSs, the
difference is taken to retained earnings, or other category of equity, if appropriate.
Slightly different rules apply to all other subsidiaries (i.e. those not acquired in a business
combination but created) that an entity did not consolidate under its previous GAAP,
the main difference bein
g that goodwill should not be recognised in relation to those
subsidiaries (see 5.8 below). [IFRS 1.IG27(c)].
Note that this exemption requires the use of the carrying value of the investment in the
separate financial statements of the parent prepared using IAS 27 – Separate Financial
Statements. Therefore, if a first-time adopter, in its separate financial statements, does
not opt to measure its cost of investment in a subsidiary at its fair value or previous
GAAP carrying amount at the date of transition, it is required to calculate the deemed
cost of the goodwill by comparing the cost of the investment to its share of the carrying
amount of the net assets determined on a different date. [IFRS 1.D15]. In the case of a highly
profitable subsidiary this could give rise to the following anomaly:
Example 5.28: Calculation of deemed cost of goodwill
Entity C acquired Entity D before the date of transition for $500. The net assets of Entity D would have been
$220 under IFRSs at the date of acquisition. Entity D makes on average an annual net profit of $60, which it
does not distribute to Entity C.
At the date of transition to IFRSs, the cost of Entity C’s investment in Entity D is still $500. However, the
net assets of Entity D have increased to $460. Therefore, under IFRS 1 the deemed cost of goodwill is $40.
The deemed cost of goodwill is much lower than the goodwill that was paid at the date of acquisition because
Entity D did not distribute its profits. In fact, if Entity D had distributed a dividend to its parent just before its
date of transition, the deemed cost of goodwill would have been significantly higher.
5.2.8
Previously consolidated entities that are not subsidiaries
A first-time adopter may have consolidated an investment under its previous GAAP that
does not meet the definition of a subsidiary under IFRSs. In this case the entity should
first determine the appropriate classification of the investment under IFRSs and then
First-time
adoption
267
apply the first-time adoption rules in IFRS 1. Generally such previously consolidated
investments should be accounted for as either:
• an associate, a joint venture or a joint operation: First-time adopters applying the
business combinations exemption should also apply that exemption to past
acquisitions of investments in associates, joint ventures or joint operations.
[IFRS 1.C5]. If the business combinations exemption is not applicable or the entity
did not acquire (i.e. created) the investment in the associate or joint venture,
IAS 28 – Investments in Associates and Joint Ventures – should be applied
retrospectively unless the entity applies the joint arrangements exemption.
[IFRS 1.D31]. (see 5.18 below);
• an investment under IFRS 9 (see 5.11 below); or
• an executory contract or service concession arrangement: There are no first-time
adoption exemptions that apply; therefore, IFRSs should be applied
retrospectively. However, a practical relief is provided for a service concession
arrangement if retrospective application is impracticable (see 5.14 below).
5.2.9
Measurement of deferred taxes and non-controlling interests
Deferred tax is calculated based on the difference between the carrying amount of
assets and liabilities and their respective tax base. Therefore, deferred taxes should be
recalculated after all assets acquired and liabilities assumed have been adjusted under
IFRS 1. [IFRS 1.C4(k)].
IFRS 10 defines non-controlling interest as the ‘equity in a subsidiary not
attributable, directly or indirectly, to a parent.’ [IFRS 10 Appendix A]. This definition is
discussed in Chapter 6. Non-controlling interests should be calculated after all
assets acquired, liabilities assumed and deferred taxes have been adjusted under
IFRS 1. [IFRS 1.C4(k)].
Any resulting change in the carrying amount of deferred taxes and non-controlling
interests should be recognised by adjusting retained earnings (or, if appropriate, another
category of equity), unless they relate to adjustments to intangible assets that are
adjusted against goodwill. See Example 5.29 below. [IFRS 1.IG Example 4].
In terms of treatment of a deferred tax, there is a difference depending on whether
the first-time adopter previously recognised acquired intangible assets in accordance
with its previous GAAP or whether it had subsumed the intangible asset into goodwill
(in both cases, a deferred tax liability was not recognised under its previous GAAP
but is required to be recognised under IFRS). In the first case it must recognise a
deferred tax liability and adjust non-controlling interests and opening reserves
accordingly. By contrast, in the second case it would have to decrease the carrying
amount of goodwill, recognise the intangible assets and a deferred tax liability and
adjust non-controlling interests as necessary, as discussed at 5.2.5 above. The IASB
discussed this issue in October 2005, but decided not to propose an amendment to
address this inconsistency.4
Example 5.29 below illustrates how to account for restatement of intangible assets,
deferred tax and non-controlling interests where previous GAAP requires deferred tax
to be recognised.
268 Chapter
5
Example 5.29: Restatement of intangible assets, deferred tax and non-
controlling interests
Entity A’s first IFRS financial statements are for a period that ends on 31 December 2019 and include
comparative information for 2018 only. On 1 July 2015, Entity A acquired 75% of subsidiary B. Under its
previous GAAP, Entity A assigned an initial carrying amount of £200 to intangible assets that would not have
qualified for recognition under IAS 38. The tax base of the intangible assets was £nil, giving rise to a deferred
tax liability (at 30%) of £60. Entity A measured non-controlling interests as their share of the fair value of
the identifiable net assets acquired. Goodwill arising on the acquisition was capitalised as an asset
in Entity A’s consolidated financial statements.
On 1 January 2018 (the date of transition to IFRSs), the carrying amount of the intangible assets under previous
GAAP was £160, and the carrying amount of the related deferred tax liability was £48 (30% of £160).
Under IFRS 1, Entity A derecognises intangible assets that do not qualify for recognition as separate assets under
IAS 38, together with the related deferred tax liability of £48 and non-controlling interests, with a corresponding
increase in goodwill (see 5.2.5 above). The related non-controlling interests amount to £28 (25% of £112 (£160
minus £48)). Entity A makes the following adjustment in its opening IFRS statement of financial position:
£
£
Goodwill
84
Deferred tax liability
48
Non-controlling interests
28
Intangible assets
160
Entity A tests the goodwill for impairment under IAS 36 and recognises any resulting impairment loss, based
on conditions that existed at the date of transition to IFRSs.
5.2.10
Transition accounting for contingent consideration
The business combination exemption does not extend to contingent consideration that
arose from a transaction that occurred before the transition date, even if the acquisition
itself is not restated due to the use of the exemption. Therefore, such contingent
consideration, other than that classified as equity under IAS 32, is recognised at its fair
value at the transition date, regardless of the accounting under previous GAAP. If the
contingent consideration was not recognised at fair value at the date of transition under
previous GAAP, the resulting adjustment is recognised in retained earnings or other
category of equity, if appropriate. Subsequent adjustments will be recognised following
the provisions of IFRS 3. [IFRS 3.40, 58].
5.3
Share-based payment transactions
IFRS 2 applies to accounting for the acquisition of goods or services in equity-settled
share-based payment transactions, cash-settled share-based payment transactions and
transactions in which the entity or the counterparty has the option to choose between
settlement in cash or equity. There is no exemption from recognising share-based
payment transactions that have not yet vested at the date of transition to IFRSs. The
exemptions in IFRS 1 clarify that a first-time adopter is not required to apply IFRS 2 fully
retrospectively to equity-settled share-based payment transactions that have already
vested at the date of transition to IFRSs. IFRS 1 contains the following exemptions and
requirements regarding share-based payment transactions:
First-time
adoption
269
(a) only if a first-time adopter has disclosed publicly the fair value of its equity
instruments, determined at the measurement date, as defined in IFRS 2, then it is
encouraged to apply IFRS 2 to: [IFRS 1.D2]
(i) equity instruments that were granted on or before 7 November 2002 (i.e. the
date the IASB issued ED 2 – Share-based Payment);
(ii) equity instruments that were granted after 7 November 2002 but vested
before the date of transition to IFRSs.
Many first-time adopters that did not use fair value-based share-based payment
accounting under previous GAAP will not have published the fair value of equity
instruments granted and are, therefore, not allowed to apply IFRS 2 retrospectively
to those share-based payment transactions;
(b) for all grants of equity instruments to which IFRS 2 has not been applied a first-
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 54
