International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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at the date that the event occurs. An entity should recognise the resulting adjustments
directly in retained earnings (or if appropriate, another category of equity) at the
measurement date. [IFRS 1.D8(b)].
The Board explicitly considered whether to allow a first-time adopter that uses a
revaluation subsequent to the date of transition to ‘work back’ to the deemed cost on
the date of transition to IFRSs by adjusting the revaluation amounts to exclude any
depreciation, amortisation or impairment between the date of transition to IFRSs and
the date of that measurement. [IFRS 1.BC46B]. The Board rejected this approach
‘because making such adjustments would require hindsight and the computed
carrying amounts on the date of transition to IFRSs would be neither the historical
costs of the revalued assets nor their fair values on that date.’ [IFRS 1.BC46B].
Accordingly, at the date of transition to IFRS, the entity should either establish the
deemed cost by applying the criteria in paragraphs D5 – D7 of IFRS 1 or measure
assets and liabilities under the other requirements in IFRS 1. [IFRS 1.D8(b)]. This
restriction seems to limit the usefulness of the exemption for first time adopters;
however, it should provide relief from the need to keep two sets of books subsequent
to the event.
5.5.3
Deemed cost for oil and gas assets
It is common practice in some countries to account for exploration and development
costs for oil and gas properties in development or production phases in cost centres that
include all properties in a large geographical area, e.g. under the ‘full cost accounting’
method. However, this method of accounting generally uses a unit of account that is
much larger than that is acceptable under IFRSs. Applying IFRSs fully retrospectively
would pose significant problems for first-time adopters because it would also require
amortisation ‘to be calculated (on a unit of production basis) for each year, using a
reserves base that has changed over time because of changes in factors such as
geological understanding and prices for oil and gas. In many cases, particularly for older
assets, this information may not be available.’ [IFRS 1.BC47A]. Even when such information
is available, the effort and cost to determine the opening balances at the date of
transition would usually be very high.
For these entities, use of the fair value as deemed cost exemption (see 5.5.1 above),
however, was not considered to be suitable because: [IFRS 1.BC47B]
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‘Determining the fair value of oil and gas assets is a complex process that begins
with the difficult task of estimating the volume of reserves and resources. When
the fair value amounts must be audited, determining significant inputs to the
estimates generally requires the use of qualified external experts. For entities with
many oil and gas assets, the use of this fair value as deemed cost alternative would
not meet the Board’s stated intention of avoiding excessive cost.’
The IASB therefore decided to grant an exemption for first-time adopters that
accounted under their previous GAAP for ‘exploration and development costs for oil
and gas properties in the development or production phases ... in cost centres that
include all properties in a large geographical area.’ [IFRS 1.D8A]. Under the exemption, a
first-time adopter may elect to measure oil and gas assets at the date of transition to
IFRSs on the following basis: [IFRS 1.D8A]
(a) exploration and evaluation assets at the amount determined under the entity’s
previous GAAP; and
(b) assets in the development or production phases at the amount determined for the
cost centre under the entity’s previous GAAP. This amount should be allocated to
the cost centre’s underlying assets pro rata using reserve volumes or reserve values
as of that date.
For this purpose, oil and gas assets comprise only those assets used in the exploration,
evaluation, development or production of oil and gas. [IFRS 1.D8A].
A first-time adopter that uses the exemption under (b) above should disclose that fact
and the basis on which carrying amounts determined under previous GAAP were
allocated. [IFRS 1.31A].
To avoid the use of deemed costs resulting in an oil and gas asset being measured at
more than its recoverable amount, the Board also decided that oil and gas assets that
were valued using this exemption should be tested for impairment at the date of
transition to IFRSs as follows: [IFRS 1.D8A]
• exploration and evaluation assets should be tested for impairment under IFRS 6; and
• assets in the development and production phases should be tested for impairment
under IAS 36.
The deemed cost amounts should be reduced to take account of any impairment charge.
Finally, a first-time adopter that applies the deemed cost exemption for oil and gas
assets in the development or production phases in (b) above should also apply the
exception to the IFRIC 1 – Changes in Existing Decommissioning, Restoration and
Similar Liabilities – exemption to the related decommissioning and restoration
obligation (see 5.13.2 below). [IFRS 1.D21A].
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Extract 5.8 below presents disclosure of the use of the ‘deemed cost for oil and gas
assets’ exemption.
Extract 5.8: Zargon Oil & Gas Ltd. (2011)
Notes to the Consolidated Financial Statements [extract]
27
Reconciliation of Transition from Canadian GAAP to IFRS [extract]
Explanatory notes [extract]
(b)
The Company elected under IFRS 1 to deem the Canadian GAAP carrying value of its oil and gas assets
accounted for under the full cost method as at January 1, 2010 as their deemed cost under IFRS as at that
date. As such, the Canadian GAAP full cost pool was reallocated upon transition to IFRS and the 2010
comparatives were restated to reflect the new IFRS accounting policies as follows:
i.
In accordance with IAS 16, IAS 38 and IFRS 6 on January 1, 2010 the Company reallocated costs of $24.37 million
relating to unproved properties from property, plant and equipment to exploration and evaluation assets.
ii.
Under Canadian GAAP, all costs incurred prior to having obtained licence rights and lease expiries were
included within property, plant and equipment. Under IFRS, such expenditures are expensed as incurred.
There was no impact on adoption of IFRS due to the full cost as deemed cost exemption. However, the
comparative 2010 balances were restated at December 31, 2010 resulting in a reduction in property, plant
and equipment and retained earnings of $2.81 million, and an increase in exploration and evaluation expenses
for the year of the same amounts.
iii.
The remaining full cost pool was allocated to the developed and producing assets pro rata using reserve values.
iv.
Under IFRS, impairment tests must be performed at a more lower reporting level than was required under Canadian
GAAP. The Canadian GAAP “ceiling test” incorporated a 2-step approach for testing impairment, while IFRS uses
a 1-step approach. Under Canadian GAAP, a discounted cash flow analysis was not req
uired if the undiscounted cash
flows from proved reserves exceeded the carrying amount (step 1). If the carrying amount exceeded the undiscounted
future cash flows, then a prescribed discounted cash flow test was performed (step 2). Under IFRS, impairment testing
is based on discounted cash flows and is calculated at the CGU level. Impairment tests are required to be performed
at the transition date, and as at January 1, 2010 no impairment was identified. At December 31, 2010 an impairment
test was performed and four of the Company’s CGUs were found to have impairment.
5.5.4
Deemed cost for assets used in operations subject to rate regulation
Entities that hold items of property, plant and equipment, right-of-use assets under
IFRS 16 or intangible assets that are used, or were previously used, in operations subject
to rate regulation might have capitalised, as part of the carrying amounts, amounts that
do not qualify for capitalisation in accordance with IFRSs. For example, when setting
rates, regulators often permit entities to capitalise an allowance for the cost of financing
the asset’s acquisition, construction or production. This allowance typically includes an
imputed cost of equity. IFRSs do not permit an entity to capitalise an imputed cost of
equity. [IFRS 1.BC47F]. The IASB decided to permit a first-time adopter with operations
subject to rate regulations to elect to use the previous GAAP carrying amount of such
an item at the date of transition to IFRSs as deemed cost. [IFRS 1.D8B]. In the Board’s view,
this exemption is consistent with other exemptions in IFRS 1 in that it ‘avoids excessive
costs while meeting the objectives of the IFRS.’ [IFRS 1.BC47I].
Operations are subject to rate regulation if they are governed by a framework for
establishing the prices that can be charged to customers for goods or services and that
framework is subject to oversight and/or approval by a rate regulator (as defined in
IFRS 14 – Regulatory Deferral Accounts). [IFRS 1.D8B, IFRS 14 Appendix A].
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Without this exemption, a first-time adopter with operations subject to rate regulations
would have had either to restate those items retrospectively to remove the non-
qualifying amounts, or to use fair value as deemed cost (see 5.5.1 above). Both
alternatives, the Board reasoned, pose significant practical challenges, the cost of which
can outweigh the benefits. [IFRS 1.BC47G]. Typically, once amounts are included in the total
cost of an item of property, plant and equipment, they are no longer tracked separately.
Therefore, their removal would require historical information that, given the age of
some of the assets involved, is probably no longer available and would be difficult to
estimate. For many of these assets, it may be impractical to use the fair value exemption
as such information may not be readily available. [IFRS 1.BC47H].
A first-time adopter that applies this exemption to an item need not apply it to all items.
At the date of transition to IFRSs, the first-time adopter should test for impairment in
accordance with IAS 36 each item for which it used the exemption. [IFRS 1.D8B].
Extract 5.9 below illustrates disclosure of the use of the deemed cost exemption for
property, plant and equipment and intangible assets used in operations subject to rate
regulation although IFRS 14 is not applied.
Extract 5.9: Enersource Corporation (2012)
Notes to Consolidated Financial Statements [extract]
Note 5 First-time adoption of IFRS: [extract]
(a) Previous Canadian GAAP carrying amount as deemed costs for PP&E and intangible assets. [extract]
Entities with operations subject to rate regulations may hold items of PP&E or intangible assets where the
carrying amount of such items might include amounts that were determined under previous Canadian GAAP but
do not qualify for capitalization in accordance with IFRS. If this is the case, a first-time adopter may elect to use
the previous Canadian GAAP carrying amount of such an item at the date of transition to IFRS as deemed cost.
An entity shall apply this exemption for annual periods beginning on or after 1 January 2011, but earlier
application is permitted.
Entities are subject to rate regulation if they provide goods or services to customers at prices (i.e. rates) established by an authorized body empowered to establish rates that bind the customers and that are designed to recover the
specific costs the entity incurs in providing the regulated goods or services and to earn a specified return.
Under this exemption the deemed cost at the date of transition becomes the new IFRS cost basis. The accumulated
amortization recognized under previous Canadian GAAP prior to the transition date has been included as part of the
deemed cost so that the net book values will not be affected.
At the date of transition to IFRS, an entity shall also test for impairment, each item for which this exemption is used.
This exemption does not only apply to individual entities with rate regulated activities but also to the consolidated
financial statements of their parent companies.
Based on the definition above, the Corporation qualifies for this IFRS 1 exemption as Enersource Hydro is subject
to rate regulations and accordingly the Corporation elected to use the deemed cost election for opening balance
sheet values for its PP&E and intangible assets.
At the date of transition, the Corporation’s gross book value, accumulated depreciation and net book value for PP&E
was $872,359, $422,992 and $449,367 respectively. The gross book value, accumulated amortization and net book
value for intangible assets was $18,389, $2,806 and $15,583 respectively.
The Corporation reviewed the additional requirements against the information provided in IAS 36 – Impairment of
Assets – and determined that no impairments would be recorded.
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While the current exemption in paragraph D8B of IFRS 1 provides a one-time relief to
determine the transition date balances of the eligible property, plant and equipment,
right-of-use assets under IFRS 16 and intangible assets, IFRS 14 is wider in scope
(see 5.20 below).
5.6 Leases
IFRS 1 does not include any specific exemption from the retrospective application of
IAS 17 – Leases – and SIC-15 – Operating Leases – Incentives. Therefore, a first-time
adopter is required to classify leases as operating or finance leases under IAS 17 based
on the circumstances existing at the inception of the lease and not those existing at the
date of transition to IFRSs. [IFRS 1.IG14]. However, if ‘at any time the lessee and the lessor
agree to change the provisions of the lease, other than by renewing the lease, in a
manner that would have resulted in a different classification of the lease ... if the changed
terms had been in effect at the inception of the lease, the revised agreement is regarded
as a new agreement over its term.’ [IAS 17.13]. In other words, an entity classifies a lease
based on the lease terms that are in force at its date of transition to IFRSs; the lease
classification is not based on lease terms that are no longer in force.
A first-time adopter should apply SIC-15 retrospectively to all leases, regardless of their
starting date. [IFRS 1.IG16].
5.6.1
IFRIC 4
(prior to adoption of IFRS 16)
IFRIC 4 – Determining whether an Arrangement contains a Lease – contains specific
transitional provisions for existing IFRS-reporting entities that address the practical
difficulties of going back potentially many years and making a meaningful assessment of
whether the arrangement satisfied the criteria at that time. First-time adopters may apply
the same transitional provisions, which allow them to apply IFRIC 4 to arrangements
existing at their date of transition on the basis of facts and circumstances existing at that
date. [IFRS 1.D9]. The example below based on the implementation guidance in IFRS 1
illustrates this exemption. [IFRS 1.IG Example 202].
Example 5.31: Determining whether an arrangement contains a lease
Entity A’s first IFRS financial statements are for a period that ends on 31 December 2019 and include
comparative information for 2018 only. Its date of transition to IFRSs is 1 January 2018.
On 1 January 2007, Entity A entered into a take-or-pay arrangement to supply gas. On 1 January 2012, there
was a change in the contractual terms of the arrangement.
On 1 January 2018, Entity A may determine whether the arrangement contains a lease under IFRIC 4 on the
basis of facts and circumstances existing on that date. Alternatively, Entity A may apply the criteria in
IFRIC 4 on the basis of facts and circumstances existing on 1 January 2007 and reassess the arrangement on
1 January 2012.
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5.6.2
Arrangements assessed for lease accounting under previous GAAP
(prior to adoption of IFRS 16)
A first-time adopter may have adopted a standard under its previous GAAP that had the
same effect as the requirements of IFRIC 4 and that had the same transitional
provisions, even if the wording was not identical and that may have had a different
starting date than IFRIC 4. This exemption addresses a first-time adopter that has
already assessed whether its existing arrangements contained leases, as required by
IFRIC 4. The date at which it made that assessment would be other than that required
by IFRIC 4, e.g. it would not have been at inception of the lease and might have been