made before IFRIC 4 was issued. The exemption allows the entity not to reassess that
determination when it adopts IFRSs. The IASB added that ‘for an entity to have made
the same determination of whether the arrangement contained a lease in accordance
with previous GAAP, that determination would have to have given the same outcome
as that resulting from applying IAS 17 and IFRIC 4.’ [IFRS 1.D9A].
5.6.3 IFRS
16
In January 2016 the IASB issued IFRS 16 – Leases – which will be effective for annual
reporting periods beginning on or after 1 January 2019 with an earlier application
permitted. The consequential amendments to IFRS 1 (paragraph D9-D9E) provide first-
time adopters with some exemptions from full retrospective application of IFRS 16.
Firstly, similar to that in 5.6.1 above, a first-time adopter may assess whether a contract
existing at the date of transition contains a lease by applying IFRS 16 to these contracts
on the basis of facts and circumstances existing at that date.
In addition, a first-time adopter that is a lessee may apply the following approach to all
of its leases (subject to the practical expedients described below):
(a) Measure a lease liability at the date of transition to IFRS. A lessee should measure
the lease liability at the present value of the remaining lease payments, discounted
using the lessee’s incremental borrowing rate at the transition date.
(b) Measure a right-of-use asset at the transition date by choosing, on a lease-by-lease
basis, either:
(i) its carrying amount as if IFRS 16 had been applied since the commencement
date of the lease, but discounted using the lessee’s incremental borrowing rate
at the transition date; or
(ii) an amount equal to the lease liability, adjusted by the amount of any prepaid
or accrued lease payments relating to that lease recognised in the statement
of financial position immediately before the transition date.
(c) Apply IAS 36 to right-of-use assets at the transition date.
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Notwithstanding the exemption above, a first-time adopter that is a lessee should
measure the right-of-use asset at fair value at the transition date for leases that meet the
definition of investment property in IAS 40 and are measured using the fair value model
in IAS 40 from the transition date.
Additionally a first-time adopter that is a lessee may apply one or more of the following
practical expedients at the transition date (applied on a lease-by-lease basis):
(a) apply a single discount rate to a portfolio of leases with reasonably similar
characteristics (e.g. a similar remaining lease term for a similar class of underlying
assets in a similar economic environment);
(b) elect not to apply paragraph D9B to leases for which the lease term ends
within 12 months of the transition date. Instead, the entity should account for
(including disclosure of information about) these leases as if they were short-term
leases accounted for under paragraph 6 of IFRS 16;
(c) elect not to apply paragraph D9B to leases for which the underlying asset is of low
value (as described in paragraphs B3-B8 of IFRS 16). Instead, the entity should
account for (including disclosure of information about) these leases under
paragraph 6 of IFRS 16;
(d) exclude initial direct costs from the measurement of the right-of-use asset at the
transition date; and
(e) use hindsight, such as in determining the lease term if the contract contains options
to extend or terminate the lease.
Lease payments, lessee, lessee’s incremental borrowing rate, commencement date of
the lease, initial direct costs and lease term are defined in IFRS 16 and are used in IFRS 1
with the same meaning.
5.7
Cumulative translation differences
IAS 21 requires that, on disposal of a foreign operation, the cumulative amount of the
exchange differences deferred in the separate component of equity relating to that
foreign operation (which includes, for example, the cumulative translation difference
for that foreign operation, the exchange differences arising on certain translations to a
different presentation currency and any gains and losses on related hedges) should be
reclassified to profit or loss when the gain or loss on disposal is recognised.
[IAS 21.48, IFRS 1.D12]. This also applies to exchange differences arising on monetary items
that form part of a reporting entity’s net investment in a foreign operation in its
consolidated financial statements. [IAS 21.32, 39, IFRS 1.D12].
Full retrospective application of IAS 21 would require a first-time adopter to restate all
financial statements of its foreign operations to IFRSs from their date of inception or
later acquisition onwards, and then determine the cumulative translation differences
arising in relation to each of these foreign operations. A first-time adopter need not
comply with these requirements for cumulative translation differences that existed at
the date of transition. If it uses this exemption: [IFRS 1.D13]
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(a) the cumulative translation differences for all foreign operations are deemed to be
zero at the date of transition to IFRSs; and
(b) the gain or loss on a subsequent disposal of any foreign operation must exclude
translation differences that arose before the date of transition but must include
later translation differences.
If a first-time adopter chooses to use this exemption, it should apply it to all foreign
operations at its date of transition, which will include any foreign operations that
became first-time adopters before their parent. Any existing separate component of the
first-time adopter’s equity relating to such translation differences would be transferred
to retained earnings at the date of transition.
An entity may present its financial statements in a presentation currency that differs
from its functional currency. IFRS 1 is silent on whether the cumulative translation
differences exemption should be applied to all translation differences or possibly
separately to differences between the parent’s functional currency and the presentation
currency. However, IAS 21 does not distinguish between the translation differences
arising on translation of subsidiaries into the functional currency of the parent and those
arising on the translation from the parent’s functional currency to the presentation
currency. In our opinion, the exemption should therefore be applied consistently to
both types of translation differences.
Since there is no requirement to justify the use of the exemption on grounds of
impracticality or undue cost or effort, an entity that already has a separate component
of equity and the necessary information to determine how much of it relates to each
foreign operation in accordance with IAS 21 (or can do so without much effort) is still
able to use the exemption. Accordingly, an entity that has cumulative exchange losses
in respect of foreign operations may consider it advantageous to use the exemption if it
wishes to avoid having to recognise these losses in profit or loss if the foreign operation
is sold at some time
in the future.
The extract below illustrates how companies typically disclose the fact that they have
made use of this exemption.
Extract 5.10: Coca-Cola FEMSA S.A.B. de C.V. (2012)
NOTE 27 First-time adoption of IFRS [extract]
27.3 Explanation of the effects of the adoption of IFRS [extract]
h) Cumulative Translation Effects [extract]
The Company decided to use the exemption provided by IFRS 1, which permits it to adjust at the transition date
all the translation effects it had recognized under Mexican FRS to zero and begin to record them in accordance
with IAS 21 on a prospective basis. The effect was Ps. 1,000 at the transition date, net of deferred income taxes
of Ps. 1,887.
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5.7.1
Gains and losses arising on related hedges
Although IFRS 1 is not entirely clear whether this exemption extends to similar gains and
losses arising on related hedges, we believe it is entirely appropriate for this exemption to
be applied to net investment hedges as well as the underlying gains and losses.
Paragraph D13, which contains the exemption, explains that a first-time adopter need
not comply with ‘these requirements.’ [IFRS 1.D13]. The requirements referred to are those
summarised in paragraph D12 which explain that IAS 21 requires an entity:
(a) to recognise some translation differences in other comprehensive income and
accumulate these in a separate component of equity; and
(b) on disposal of a foreign operation, to reclassify the cumulative translation difference for
that foreign operation (including, if applicable, gains and losses on related hedges) [our
emphasis] from equity to profit or loss as part of the gain or loss on disposal. [IFRS 1.D12].
The problem arises because paragraph D12 does not refer to the recognition of hedging
gains or losses in other comprehensive income and accumulation in a separate
component of equity (only the subsequent reclassification thereof). Accordingly, a very
literal reading of the standard might suggest that an entity is required to identify
historical gains and losses on such hedges. However, even if this position is accepted,
the basis on which this might be done is not at all clear.
It is clear that the reasons cited by the IASB for including this exemption apply as much
to related hedges as they do to the underlying exchange differences. The fact that IFRS 1
can be read otherwise might be seen as little more than poor drafting.
5.8
Investments in subsidiaries, joint ventures and associates
5.8.1
Consolidated financial statements: subsidiaries and structured entities
A first-time adopter should consolidate all subsidiaries (as defined in IFRS 10) unless
IFRS 10 requires otherwise. [IFRS 1.IG26]. First-time adoption of IFRSs may therefore
result in the consolidation for the first time of a subsidiary not consolidated under
previous GAAP, either because the subsidiary was not regarded as such before, or
because the parent did not prepare consolidated financial statements. If a first-time
adopter did not consolidate a subsidiary under its previous GAAP, it should recognise
the assets and liabilities of that subsidiary in its consolidated financial statements at the
date of transition 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)].
If the newly-consolidated subsidiary was acquired in a business combination before the
date of the parent’s transition to IFRSs, goodwill is the difference between the parent’s
interest in the carrying amount determined under either (a) or (b) above and the cost in
the parent’s separate financial statements of its investment in the subsidiary. This is no
more than a pragmatic ‘plug’ that facilitates the consolidation process but does not
represent the true goodwill that might have been recorded if IFRSs had been applied to
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the original business combination (see 5.2.7 above). [IFRS 1.C4(j), IG27(b)]. Therefore, if the
first-time adopter accounted for the investment as an associate under its previous
GAAP, it cannot use the notional goodwill previously calculated under the equity
method as the basis for goodwill under IFRSs.
If the parent did not acquire the subsidiary, but established it, it does not recognise
goodwill. [IFRS 1.IG27(c)]. Any difference between the carrying amount of the subsidiary
and the identifiable net assets as determined in (a) or (b) above would be treated as an
adjustment to retained earnings, representing the accumulated profits or losses that
would have been recognised as if the subsidiary had always been consolidated.
The adjustment of the carrying amounts of assets and liabilities of a first-time adopter’s
subsidiaries may affect non-controlling interests and deferred tax, as discussed at 5.2.9
above. [IFRS 1.IG28].
5.8.2
Separate financial statements: Cost of an investment in a subsidiary,
joint venture or associate
When an entity prepares separate financial statements, IAS 27 requires a first-time adopter
to account for its investments in subsidiaries, joint ventures and associates either: [IFRS 1.D14]
• at cost;
• in accordance with IFRS 9 – Financial Instruments; or
• using the equity method as described in IAS 28.
However, if a first-time adopter measures such an investment at cost then it can elect
to measure that investment at one of the following amounts in its separate opening IFRS
statement of financial position: [IFRS 1.D15]
(a) cost determined in accordance with IAS 27; or
(b) deemed cost, which is its:
(i) fair value at the entity’s date of transition to IFRSs in its separate financial
statements; or
(ii) previous GAAP carrying amount at that date.
A first-time adopter may choose to use either of these bases to measure its investment in
each subsidiary, joint venture or associate where it elects to use a deemed cost. [IFRS 1.D15].
For a first-time adopter that choose to account for such an investment using the equity
method procedures in accordance with IAS 28:
(a) the first-time adopter applies the exemption for past business combinations in
IFRS 1 (Appendix C) to the acquisition of the investment;
(b) if the entity becomes a first-time adopter for its separate financial statements
earlier than for its consolidated financial statements and:
(i) later than its parent, the entity would apply paragraph D16 of IFRS 1 in its
separate financial statements;
(ii) later than its subsidiary, the entity would apply paragraph D17 of IFRS 1 in its
separate financial statements. [IFRS 1.D15A].
A first-time adopter that applies the exemption should disclose certain additional
information in its financial statements (see 6.5.2 below).
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5.9
Assets and liabilities of subsidiaries, associates and joint ventures
Within groups, some subsidiaries, associates and joint ventures may have a different date of
transition to IFRSs than the parent/investor, for example, because national legislation
required IFRSs after, or prohibited IFRSs at, the date of transition of the parent/investor. As
this could have resulted in permanent differences between the IFRS figures in a subsidiary’s
own financial statements and those it reports to its parent, the IASB introduced a special
exemption regarding the assets and liabilities of subsidiaries, associates and joint ventures.
IFRS 1 contains detailed guidance on the approach to be adopted when a parent adopts
IFRSs before its subsidiary (see 5.9.1 below) and when a subsidiary adopts IFRSs before
its parent (see 5.9.2 below).
These provisions also apply when IFRSs are adopted at different dates by an investor in
an associate and the associate, or a venturer in a joint venture and the joint venture.
[IFRS 1.D16-D17]. In the discussion that follows ‘parent’ includes an investor in an associate
or a venturer in a joint venture, and ‘subsidiary’ includes an associate or a joint venture.
References to consolidation adjustments include similar adjustments made when
applying equity accounting. IFRS 1 also addresses the requirements for a parent that
adopts IFRSs at different dates for the purposes of its consolidated and its separate
financial statements (see 5.9.4 below).
5.9.1
Subsidiary becomes a first-time adopter later than its parent
If a subsidiary becomes a first-time adopter later than its parent, it should in its financial
statements measure its own assets and liabilities at either:
(a) the carrying amounts that would be included in the parent’s consolidated financial
statements, based on the parent’s date of transition, if no adjustments were made
for consolidation procedures and for the effects of the business combination in
which the parent acquired the subsidiary; or
(b) the carrying amounts required by the rest of IFRS 1, based on the subsidiary’s date
of transition. These carrying amounts could differ from those described in (a) when:
(i) exemptions in IFRS 1 result in measurements that depend on the date of
transition;
(ii) the subsidiary’s accounting policies are different from those in the consolidated
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